Q&A with Associate Ankita Sangwan

By Katarina Marcial

The Editors chatted with Associate Ankita Sangwan, a member of the Firm’s Corporate Governance Team in its New York office, to learn about her career journey, the motivations behind her pursuit of corporate governance, her most rewarding case, and what advice she has for aspiring lawyers.

Monitor: Can you share a little about your background and interests?

Ankita Sangwan: I grew up in multiple cities across India, as my dad was in the military. I attended law school there. During the pandemic, I decided to pursue my master’s degree and applied to universities across the globe. I was accepted at Columbia, which brought me to New York. As for my interests, I enjoy reading science fiction and dystopian novels. I was a fan of “Dune” before it gained widespread popularity. I’m also conscious of health, nutrition and fitness, and I enjoy hiking and Pilates on the weekends.

Monitor: Was it challenging to transition to a new country and assimilate to a new work environment, customs, and differences in the legal fields?

Ankita Sangwan: Graduate school was not particularly difficult. Fortunately, I did not face many challenges adapting. The teaching methods at my master’s program were similar to those we had at my law school in India, which made the transition smooth. Naturally, there were cultural differences that required me to step out of my comfort zone when I first met people. In Columbia’s masters program, we had students from around the world. It helped to have many people trying to assimilate together, which facilitated a good support system for me. Overall, the experience was new and exciting. Starting in a new place can be daunting, particularly when making friends in a new city. However, once I overcame my initial nerves, it was a great experience. Starting at any new workplace is always different, and because I worked at a law firm in India for around four years, I had to adjust to the differences in the U.S. legal system. The biggest difference was that the U.S. has a parallel court system at the state and federal levels. They don’t have that in India. I had to get used to different procedures and ways of doing certain things, which required me to unlearn and be open to new processes.

Monitor: What got you into corporate governance, and why do you think it’s important?

Ankita Sangwan: I took a class on securities law at Columbia, which led me to the field of corporate governance. Class actions are unique to the United States and aren’t something we have back in India or that I’ve encountered in my studies of different jurisdictions. What’s interesting about it is that it’s a way for stockholders and individual investors to enforce their rights and seek reforms that wouldn’t otherwise be on the table. It’s also a way to keep corporate fiduciaries in check. Through that class, I came across a #MeToo case that Pomerantz was part of. I reached out to Gustavo Bruckner, the head of the Corporate Governance Team, because of that case. The remedies that the action pursued were interesting, not just in monetary compensation but also in terms of governance and policy reforms at organizations. Corporate governance is important because it’s really about what’s right and wrong, and it inserts checks and balances to prevent future misconduct.

Monitor: What has been the most rewarding case you’ve worked on?

Ankita Sangwan: The Lordstown Motors case was highly rewarding. It was a novel case against a SPAC – a public, “empty shell” Special Purpose Acquisition Company created with the sole intention of acquiring another company to take it public. Unlike the traditional method of going public via an initial public offering, SPACs bypass traditional initial public offerings and can be driven by conflicting incentives. In this case, we filed a class action where we alleged that the SPAC fiduciaries were conflicted by their own interests to get a deal done and close the transaction and, in the process, hid red flags about the company. It was later revealed that fiduciaries failed to disclose material facts on the vehicle’s production deadlines, pre-orders, etc. We conducted extensive discovery and researched a unique area of law, which was a valuable learning experience. When I joined Pomerantz, we were at the beginning of the discovery phase. It was fascinating to discuss this case with all counsel, understand the key focus points and observe negotiations between parties. The case lasted approximately 7 to 8 months from the start of my involvement until it settled favorably for stockholders in June 2024, a notable achievement given that the company had filed for bankruptcy.

Monitor: What advice do you have for younger lawyers looking to get into corporate governance?

Ankita Sangwan: Keep an open mind because cases may not pan out the way you think they should. Justice has various forms. When you start out, you are passionate about a particular point or case, but managing expectations is important. Ligation is a marathon, it’s not a race. You’re in it for the long haul. Sometimes, you’ll get great wins out of the gate, and sometimes, you won’t. It’s important to have patience and learn from all the victories and losses along the way.

Monitor: Have there been any influential mentors or anyone who has shaped your career as a lawyer?

Ankita Sangwan: Everyone I have met throughout my career is someone I have learned from. I worked under an amazing female partner in India, from whom I learned a great deal. I’ve also had many inspiring professors at law school. For instance, I took a class on the intersection between constitutional law and socioeconomic rights, and I was inspired to view constitutional law differently. I also took a seminar on securities law and got valuable insights from my professors, who were defense attorneys, about how they managed and strategized for cases. In my current role, the learning never stops. I’ve learned from both Gustavo and Sam [Adams] about when to push and pull back in negotiations, how to strategize cases, and just how to be a reasonable and good lawyer. I am very fortunate to have met the people I have, and I’ve learned from all of them.

The Most Magical Proxy Battle

By Stephanie Weaver

The biggest story of the 2024 proxy season was the thwarted attempt of activist investor Nelson Peltz and Trian Fund Management LLP (“Trian”), an alternative investment management fund that he co-found­ed, to secure two board seats on the Walt Disney Company (“Disney”) board of directors.

The $600-million battle between Peltz and Disney management was the most expensive proxy fight in corporate history. Analyzing the strate­gies employed by each party provides insights for future proxy battles at major public companies. While not all possess Disney’s financial re­sources or media prowess, they can adapt lessons from this conflict to tailor their fighting style to their specific strengths and the needs of their retail investors. Although Peltz did not succeed in obtaining the board seats, ultimately this battle gave Disney a push to institute changes that could enhance its stock performance.

On March 4, 2024, Trian published a 133-page white paper manifesto entitled Restore the Magic at The Walt Disney Company, calling for significant reform at Disney. A group put together by Trian held roughly $3.5 billion in Disney stock at the time. Trian aimed to have Peltz and Jay Rasulo, a former CFO at Disney, appointed to the company’s board. Its manifesto demanded an overhaul of the board and a reimagining of Disney’s business strategy. One of Peltz’s main criticisms was that the company did not have a succession plan for CEO Bob Iger’s eventual replacement. This was evidenced by the revolving-door tenure of Bob Chapek, who was appointed as Iger’s successor in 2020 and ousted in 2022, after which Iger returned to his old job.

 Trian had launched a previous campaign advocating for numerous changes at Disney in 2023. While Trian eventually withdrew from that proxy contest, it spurred Disney to launch a series of initiatives that aligned with Train’s suggestions and caused its stock to rise significantly. By proactively and preemptively responding to potential criticisms from Trian’s 2024 campaign, Disney positioned itself to effectively counter some of the expected negative feedback. While other companies may not have the advantage of foreseeing a detailed preview into a future campaign, maintaining regular meetings with shareholders, especially activist ones, being open to feedback and responsive to calls for change can significantly bolster a company’s defense against future proxy fights.

 As the battle unfolded, both sides launched campaigns to garner support from institutional and retail investors. In a typical proxy fight, institutional investors are crucial, as they hold the majority of the shares. Individual retail investors often side with management if they vote at all. However, Disney’s sub­stantial retail shareholder base, which accounts for up to 40% of its shares, primarily consists of investors who are passionate about the brand. This loyalty translates into strong opinions about the company’s management, making it important to meaningfully engage with these investors.

Peltz reached out to large institutional investors with targeted influence campaigns while using mass media to engage Disney’s enormous retail investor base. His strat­egy included promoting Trian’s RestoreTheMagic.com website and coordinating online interviews with Peltz and Rasulo alongside lengthy profiles of Peltz in the New York Times and the Financial Times. Peltz attempted to attract retail investors unhappy with the company’s recent con­tent and political stances. He received endorsements from influential entities such as Institutional Sharehold­er Services (“ISS”), a shareholder advisory firm, current and former directors of firms including Mondelez Interna­tional Inc., Procter & Gamble Co. and Janus Henderson Group Plc, proxy advisor Egan-Jones and Disney investor Neuberger Berman. Although not a shareholder, Elon Musk expressed support, indicating that he would invest in the company if Peltz joined Disney’s board.

Disney shelled out tens of millions of dollars to advertise on financial news websites and popular Hollywood pod­casts and secured endorsements from high-profile, influ­ential investors, including the legendary Hollywood film­maker and largest individual shareholder in the company, George Lucas, the shareholder advisory firm Glass Lewis & Co., activist investor ValueAct Capital Management, JPMorgan Chase & Co. CEO Jamie Dimon, Laurene Powell Jobs and members of the Disney family. Disney also garnered support from its biggest share­holders, institutional investors Vanguard Group, Inc. and BlackRock, Inc.

Disney launched a website providing updates on the implementation of its strategic plan, which was initiated after Trian’s first proxy contest in 2023. This website featured a video starring iconic Disney characters en­couraging shareholders to use Disney’s white proxy card and only vote for Disney’s nominees. With Mickey Mouse and other icons at its disposal, Disney played to its strengths with lifelong fans of its media and theme parks. Ultimately, 75% of Disney’s retail shareholders supported the company’s slate.

As retail investment continues to grow, companies and activist investors alike can benefit from forming strate­gies for creative engagement with retail investors. Disney effectively engaged with its shareholders by leveraging its expertise and lovable characters. It will be interesting to see what areas of expertise other large public companies might be able to bring to the table in future proxy battles.

 Previously, shareholders would choose between two slates of board candidates proposed by companies or activist investors. A new SEC “universal proxy rule” that allows shareholders to more easily vote for a mix of nominees from both sides may have played a role in the Disney outcome. According to the April 4, 2024 Dealbook News- letter from the New York Times, “because each side was fighting against specific individuals, instead of against an entire slate, attacks became more personal. … The new system also enabled another activist investor in Disney’s stock, Blackwell Capital, to campaign against Peltz, dividing the opposition.”

 Disney’s proxy contest was conducted under a plurality voting standard, meaning the nominees with the greatest number of votes would win the available board seats. Trian recommended that shareholders vote for its two nominees and withhold on two Disney nominees, Michael Froman and Maria Elena Lagomasino, while labeling the remaining Disney nominees as acceptable. Despite Lagomasino and Froman receiving the lowest support among the Disney nominees,ultimately Trian’s strategy did not garner enough support to secure enough votes for Peltz and Rasulo. A better strategy may have been to have shareholders vote for both Trian’s nominees while not voting for any company nominees.

 While Peltz seemed to be gaining momentum in the lead- up to the vote, his efforts were ultimately unsuccessful. On April 3, 2024, he lost, garnering only 31% of votes cast. Meanwhile, Iger received 94% support, and every one of Disney’s 12 nominees was elected.

 In the end, it’s not all bad news for activist investors like Pelz, particularly if their ultimate goal is to spur change in the company and drive up the stock. While he lost the proxy battle, Disney did implement a number of meaningful changes, and its stock rose 30% post vote. In a post-vote statement, Trian said it is “proud of the impact we have had in refocusing this company on value creation and good governance.” Perhaps the magic was (at least in part) restored after all.

Nikola Investors Win Class Certification in Securities Fraud Litigation

By Michael J. Wernke

On January 6, 2025, Judge Steven P. Logan of the District of Arizona granted Pomerantz’s motion for certi­fication of a class in its securities fraud litigation against Nikola Corporation and certain of its officers and direc­tors. The action is brought on behalf of investors who purchased stock in Nikola, an electric vehicle manu­facturer that went public on June 4, 2020 via a special purpose acquisition company (SPAC) transaction. The complaint alleges that Nikola, its founder and chairman, Trevor Milton, and other officers and directors violated section 10(b) of the Securities Exchange Act as well as section 20(a), the “control person” provision, by issuing false statements concerning essentially every aspect of the company’s business.

During the relevant period, Nikola claimed that it pro­duced zero emissions vehicles, including hydrogen fuel cell electric vehicles (FCEVs) and battery electric vehicles (BEVs), as well as hydrogen fuel for FCEVs. While Pomerantz’s complaint alleges that Defendants’ fraud spanned numerous topics touching on every aspect of Nikola’s business, in essence the fraud can be broken down into three main categories of misrepresentations.

First, Nikola claimed it had developed a fully operational “zero-emissions” Nikola One tractor trailer truck as well as a FCEV/BEV pick-up truck, the Badger. In truth, the Nikola One was an empty shell that was incapable of moving under its own power and the company had long-ago abandoned production of the vehicle. Moreover, the Badger was nothing more than a preliminary digital ren­dering of a vehicle. Second, Nikola claimed it had over 14,000 binding purchase orders for its trucks, represent­ing “billions and billions” in revenue. In truth, essentially all the orders were non-binding and were for the inop­erable, and since abandoned, Nikola One. Third, Milton repeatedly asserted that Nikola was producing hydrogen at less than a quarter of the cost industry experts be­lieved was possible. In truth, Nikola had never produced any hydrogen at all, let alone at the low prices claimed.

 Plaintiffs allege that Defendants were motivated by greed. Milton – the architect of the fraud – aimed to inflate the expectations and stock price of Nikola and to benefit from the resulting excitement to secure partnerships with top auto companies, which would further inflate Nikola’s share price. As Nikola’s single largest shareholder, Milton openly admitted within the company that he planned to dump his shares as soon as he was contractually permitted to do so, which was only six months after Nikola went public and before the market could dis­cover that the company, like the Nikola One, was an empty vessel. The other Defendants encouraged Milton to uti­lize social media to directly engage with retail investors. Despite know­ing of his fraudulent scheme, they championed his self-described “media blitzes” of misinformation because they, too, were large shareholders who stood to gain millions, if not billions, from Milton’s fraud.

Investors began to learn the truth when Nikola’s stock price plummeted following a September 10, 2020 Hindenburg Research report. Having gathered “extensive evidence—including recorded phone calls, text messages, private emails and behind-the-scenes photographs,” Hindenburg identified “dozens of false statements by [Milton],” which had led Hindenburg to conclude that Nikola “is an intricate fraud built on dozens of lies over the course of . . . Milton’s career.” There-after, the DOJ and SEC began investigations, Nikola’s partners pulled out and Milton was forced to resign. He was later indicted for, and convicted of, fraud. Nikola’s stock price plummeted 76% over the course of time that these facts were disclosed.

One requirement for class certification is that issues common to the class predominate over individualized issues. Many fraudulent misrepresentation claims do not obtain class certification because the issue of whether a class member actually relied on the alleged misrepresen­tation is an individualized inquiry. However, the United States Supreme Court has held that when federal secu­rities fraud plaintiffs establish that the securities at issue traded in an efficient market they are entitled to a “fraud-on-the-market” presumption of reliance. In other words, it is presumed that investors relied on the Defendants’ misrepresentations when purchasing the security at the market price. The presumption is founded on the theory that in an efficient market the price of a stock incorporates all available public information. Therefore, any person who purchases shares relies on the integrity of the market price and, consequently, any misrepre­sentations made by the company. This presumption, if obtained, largely eliminates an individualized inquiry of reliance that would prevent class certification.

Here, Pomerantz explained to the Court that all of the market efficiency factors traditionally analyzed by courts supported a finding that Nikola securities traded in an efficient market. For example, Nikola securities traded on the NASDAQ, a large national exchange. Moreover, factors such as the weekly trading volume, analyst coverage and the stock price’s quick response to news all indicated that the market was efficient.

Nevertheless, Defendants argued that because Nikola was a pre-revenue company that had gone public through a SPAC, the market was not efficient in the early weeks of public trading. For example, Defendants as­serted that pursuant to the company going public, large portions of Nikola stock could not be traded because of “lock-up” agreements that prohibited insiders from trad­ing their shares, which Defendants claimed placed sig­nificant constraints on short-trading and that therefore, Nikola’s stock price did not fully reflect downside pessi­mistic views. Defendants also argued that the high vola­tility of Nikola’s stock price and the lack of significance of financial results for a pre-revenue company rendered the traditional indicators of market efficiency that Plaintiffs proffered unreliable.

The Court rejected Defendants’ arguments. Notably, the Court found that Plaintiffs sufficiently addressed Defen­dants’ argument about lock-up constraints on shares. Specifically, even when taking into consideration that cer­tain shares could not be traded, the short interest trading in Nikola securities compared favorably to other securi­ties that trade in efficient markets. Moreover, the short interest in Nikola securities increased as more negative news about the company was released, which would be expected in an efficient market. Finally, not a single ana­lyst covering Nikola expressed any concern about a short sale constraint during the period. The Court thus found that Nikola securities traded in an efficient market.

The Court’s inquiry did not end there. The “fraud-on-the-market” presumption of reliance is just that – a presump­tion. It can be rebutted if the defendants demonstrate that, despite the market being efficient, the misrepresen­tations at issue were not reflected in the market price. Here, Defendants argued that the fraud-related infor­mation contained in the Hindenburg Report was already publicly known to the market prior to the publication of the Report. Because an efficient market quickly incorporates all publicly available information into the market price of the security, Defendants argued that the stock price decline following the Report must have been a result of non-fraud related information in the Report.

The Court rejected this argument as well, finding that Pomerantz had demonstrated that much of the fraud-related information contained in the Hindenburg Report had not been revealed before, and to the extent some of it had been made public, Defendants had denied any wrongdoing and assured investors that their prior state­ments were true, preventing the disclosure of the infor­mation from being fully reflected in Nikola’s stock price.

The Nikola opinion is particularly significant because it provides a roadmap for class certification where the defendant company had gone public through a SPAC, which has become a much more prevalent scenario. Although a company that goes public via a SPAC has unique features that may differ from those that go public via traditional IPOs, this decision holds that they are distinctions without a difference when analyzing market efficiency for the purposes of class certification, an important precedent for future investors.

Q&A with Of Counsels Brian O’Connell and Christopher Tourek

By Katarina Marcial

The Editors had the opportunity to chat with Brian O’ Connell and Christopher Tourek, both based in the Firm’s Chicago office, to learn about their career journeys, the motivations behind their pursuit of securities litigation, their most rewarding cases and what advice they have for aspiring lawyers. Last year, both Brian and Christopher achieved the significant milestone of being promoted from Associate to Of Counsel.

Monitor: Can you share a little about your background and interests?

Brian O’Connell: I grew up in the Chicago suburbs, attended Stanford for my undergrad, went to Northwestern for law school and I’ve remained in Chicago ever since. My wife and I have an infant daughter, which is my main “interest” right now. I’m a long-suffering Chicago sports fan of the White Sox, Bulls and Bears. My hobbies include golf and participating in a shuffleboard league. I’m licensed in both Illinois and California, which has proved beneficial, as Pomerantz’s cases span the country. Last year, I went to eight different states in four different time zones for either court appearances or depositions.

Christopher Tourek: I was born and raised in Pittsburgh, Pennsylvania. I attended Lafayette College in Easton, PA for undergrad and the University of Illinois College of Law for law school. The Windy City has been my home since 2013. Class action law has been my path from the start, a field that I love deeply. With twelve other attorneys in my family, you could say it runs in the blood. Our reunions are loud, heated, and never dull. I now live in Lincoln Park with my fiancée. Life here is good. I dive into books, explore the world through travel, hit the pavement running, carve down ski slopes, and train in Brazilian jiu-jitsu. Each pursuit, in its own way, keeps me grounded and focused.

 Monitor: What got you interested in securities litigation?

 Brian O’Connell: My interest in securities law comes from my interest in financial markets. My first real exposure to the financial markets was during an internship with the Chicago Board Options Exchange (CBOE) during undergrad. That internship and the 2008 financial crash and Dodd-Frank regula­tions led me to financial services litigation, which I’ve been doing essentially my entire career, either on the securities or commodities litigation sides, which is what I worked in before I came to Pomerantz.

 Christopher Tourek: In law school, I took a class called Perspectives on Debt. It wasn’t just theory—it was history and consequence. We traced the arc of financial markets, from the Dutch Tulip Bubble in 1637 to the railroad manias of the 19th century, and on to the crash of 2008. What stayed with me wasn’t just the mechanics of securities fraud, but its cost—real and devastating. This class changed how I saw the law.

Monitor: Why is this work so important to you?

 Brian O’Connell: I wanted to represent the victims rather than protect well-capitalized wrongdoers, and that’s exactly what I get to do at Pomerantz. Securities litigation is unique, requiring creative approaches since every case is different and lacks formal discovery before filing. Sometimes, we need to act like TV detectives speaking with former employees to crack a case and other times, we can use math and logic to catch powerful CEOs in fraud. The variety makes the work exciting.

 Christopher Tourek: Fraud doesn’t just gut the market; it ripples outward. It fuels bubbles and crashes, triggers recessions, shrinks economies. Businesses cut back, jobs vanish, homes are lost. The harm isn’t confined to traders or investors. It hits everyone, even those far from the market. Graduates stepping into a recession face years of harder roads, lower earnings, and deeper struggles. Protecting against the sweeping, lasting dam­age of unchecked securities fraud felt urgent—necessary. So, when the chance came to join Pomerantz LLP and take up that fight, I didn’t hesitate. This work matters. It always will.

Monitor: What have been the most rewarding cases you have worked on at Pomerantz?

Brian O’Connell: My favorite Pomerantz work has been on SPAC cases. We recently had a de-SPAC case against Grab Holdings, Inc., which is known as the Uber of Southeast Asia. I gave the oral argument that successfully sustained claims under Section 11 of the Securities Act and Section 14(a) of the Securities Exchange Act claims. In another de-SPAC case against Ginkgo Bioworks, we successfully advanced novel legal issues relating to SPACs. Outside of SPAC cases, we’ve recently had some cases go deep into discovery, which helps our approach for future cases. In total, my cases reached settlement agreements exceeding $100 million in 2024.

Christopher Tourek: The most rewarding case I’ve worked on, In Re Bed Bath & Beyond Corporation Securities Litigation, is still unfolding. In this case, we built something bold—a legal theory rooted in a pump-and-dump scheme orchestrated through emojis on social media. We pursued novel claims under Section 9 of the Exchange Act. It took grit and clarity to unravel the fraud and present it to the Court. Drafting the Amended Complaint, countering the Motion to Dismiss—each step was a battle. But we stood firm, and the Court ultimately sided with us. That victory wasn’t just about the law; it was about the challenge, the complexity, and the collective drive of our team to push forward into discovery. Another case that holds a place in my memory is Gong v. Neptune Wellness. It was my first at Pomerantz, and though the $4.25 million settlement in cash and stock wasn’t revolutionary, it was meaningful. I worked closely with the Lead Plaintiff, and when it was over, his gratitude—the sense of justice restored, even in part—reminded me why I do this work. The law can be a long road, but moments like that make the miles worth it.

 Monitor: What is your best advice to younger attorneys looking to succeed in securities litigation?

Brian O’Connell: Being the smartest person in the room isn’t as important as being the best prepared. Take the time to research the judge overseeing the case as their past experiences and rulings can guide your arguments.

Christopher Tourek: Never stop learning. My work on fraud cases spans various industries, including marijuana, home robotics, and banking, each one demanding something new—a deep dive into an industry until I could not only see the fraud but lay it out clearly for a court. Success depends on it. To do this work, you need more than skill; you need an unrelenting drive to learn, to dig deeper, and to keep going until the picture is clear. That urge to learn never ends—and it shouldn’t.

Pomerantz: A Dedication to Education

By Katarina Marcial

Pomerantz takes pride in being a thought leader in the ever-evolving fields of securities litigation and corporate governance. The firm’s philosophy is that education is a keystone of community, problem-solving and innovation. Through its educational initiatives, Pomerantz actively engages with institutional investors and corporate governance experts, bringing them together through various platforms, including panels, conferences and the firm’s signature Corporate Roundtable events. Pomerantz personnel also regularly participate in events organized by others, frequently as featured speakers. The final quarter of 2024 was no exception, as Jeremy A. Lieberman, Jennifer Pafiti and Dr. Daniel Summerfield participated in educational events worldwide.

Jeremy, Pomerantz’s Managing Partner, has been crisscrossing the globe for decades to meet institutional investors where they are based, educate them on their rights within and beyond the U.S. and listen to their needs. A font of legal knowledge and gifted speaker, Jeremy is frequently invited to share his insights at investor events. On November 13, 2024, he participated in a dynamic fireside chat with Leonor Martins Machado, Managing Associate at Morais Leitão, at the Global Class Actions Symposium hosted by Global Legal Group in Lisbon, Portugal. During their one-on-one conversation, Jeremy offered his perspective on the U.S. class action system, addressing topics such as securities fraud cases, the impact of the Morrison ruling – which barred recovery for losses in foreign-traded securities under the U.S. federal securities laws – and the appeal of class actions in the U.S. for investors worldwide.

Jennifer Pafiti, Partner and Head of Client Services, is dually qualified to practice law in the U.S. and the U.K. She spearheads the firm’s educational initiatives, including its Corporate Governance Roundtables, which gather some of the most influential institutional investors and corporate governance experts worldwide to discuss real-time matters that affect the value of the funds they represent.

In June 2024, Jennifer organized a Roundtable in London with special guest Sir Tony Blair, who provided an insightful assessment of the state of global affairs. Another guest speaker was Dame Laura Kenny, the U.K.’s most decorated Olympian.

Jennifer is based in Pomerantz’s Los Angeles office and co-manages its London office with Dr. Daniel Summerfield, Director of ESG and UK Client Services. Daniel joined Pomerantz in October 2022 after 20 years at the Universities Superannuation Scheme (“USS”), the United Kingdom’s largest private pension fund. Most recently, Daniel was Head of Corporate Affairs of USS, following a period of 16 years as head of Responsible Investment.

Pomerantz was a sponsor of the 2024 International Corporate Governance Network Conference held on November 12-14, 2024 in Melbourne, Australia, where Jennifer and Daniel participated in a panel on governance challenges facing investors. Their dialogue offered valuable strategies for long-term investor engagement with policymakers. They had the honor of speaking alongside Kate Griffiths from ACSI, Massimo Menchini from Assogestioni, and Luz Rodriguez from the Colorado Public Employees' Retirement Association. This panel of experts weighed in on the appropriate timing, issues to address and channels and tools that institutional investors may utilize for effective engagement, giving conference attendees actionable takeaways to implement. Additionally, Pomerantz hosted a dinner at The Society Restaurant in Melbourne, where Jennifer engaged in a spirited debate with Amy D’Eugenio, Sustainability Director at Federated Hermes Ltd., on the role of securities litigation for institutional investors.

The end of the year proved to be busy for Daniel. On November 20, 2024, he participated in a panel discussion at Assogestioni’s Board-Shareholder Dialogue Conference in Rome, where he explored the evolution of board-shareholder dialogues and examined case studies highlighting the successes and challenges of facilitating effective engagements.

Back in London, on December 5, Daniel co-hosted a breakfast event for UK pension fund trustees with QuietRoom, a pension fund communication consultancy business. During the event, insights from both pension lawyers’ and trustees’ perspectives were shared, including best practices and common pitfalls to avoid in order to ensure meaningful reporting and beneficial outcomes for pension fund beneficiaries.

Later that day, Daniel gave an in-house training session to a group of professional trustees in London. He discussed the increase in ESG and climate litigation cases in many markets, including the UK, and outlined some of the reasons behind this development, pointing to some important case studies. Daniel also looked towards the future, highlighting some issues of which trustees should be aware, including greenwashing and the importance of both evidence-based reporting and having a securities litigation monitoring program in place.

Pomerantz kicked off December by hosting a private lunch for institutional investors in London, featuring Lord Peter Mandelson as Guest of Honor. During the gathering, Lord Mandelson, a key architect of the UK Labour Party's transformation and a trusted advisor to Prime Minister Keir Starmer, discussed the new UK government agenda, the challenges facing British politics and the UK's changing role on the global stage. Jeremy, Jennifer and Daniel presided over the event.

Pomerantz reaffirmed its dedication to education in Q4 2024 and is already scheduling events for 2025. For information on where you can engage with the Pomerantz team, be sure to check out “Notable dates on the Pomerantz horizon” in each issue of the Monitor.  

Katarina Marcial is Pomerantz’s Senior Marketing Manager.

$12 Million Settlement for PureCycle Investors

By the Editors

While efforts to protect and preserve the environment are certainly commendable, issuing false and misleading statements to unwary investors regarding the viability and efficacy of such efforts are not. Pomerantz LLP, as sole Lead Counsel, recently achieved a $12 million settlement in a securities class action against PureCycle Technologies, Inc. arising from false and misleading statements PureCycle and its top executives issued regarding their plastics recycling technology. The United States District Court for the Middle District of Florida granted final approval of the settlement on October 8, 2024. Partner Tamar A. Weinrib led the litigation, Theodore v. PureCycle Technologies, Inc., et al., No. 6:21-cv-809 (M.D. Fla.). 

PureCycle went public via a de-SPAC reverse merger with Roth CH Acquisition I Co., a SPAC formed by Byron Roth. PureCycle had the dubious honor of being merely one in a long line of questionable reverse mergers Byron Roth has brought public while misleading investors regarding the underlying business, only to slap a “buy” rating on the stock and collect millions in compensation, leaving unknowing investors to suffer the consequences. Prior to taking on SPAC mergers, defendant Roth was well known for his role in facilitating numerous suspect reverse mergers involving Chinese companies, raising approximately $3.1 billion for China-based clients from 2003 to 2012. Indeed, defendant Roth was prominently featured in the 2017 documentary “The China Hustle,” detailing the nearly decades-long Chinese reverse merger scandal, which Vanity Fair called “the biggest financial scandal you’ve never heard of.”

Since its inception, PureCycle has never earned any meaningful revenue, has incurred recurring losses and has sustained negative cash flows. Its only product is a process for recycling polypropylene (“PP”), a common plastic used in multiple applications including packaging, manufacturing and consumer goods. Despite their best efforts, the world’s scientists and chemical companies have found it impossible to effectively or economically recycle PP since its invention in 1951.

However, as the complaint Pomerantz filed on behalf of aggrieved investors alleged, defendants issued false and misleading statements throughout the class period claiming to have achieved the impossible.  Specifically, the complaint alleged that defendants represented in proxy statements, a registration statement and in press releases that their recycling process was “proven” to convert waste polypropylene (called feedstock) into virgin polypropylene resin more cost effectively than manufacturing virgin polypropylene traditionally and utilizing a broader range of feedstock than traditional recycling. In reality (as multiple industry experts attested), the technology underlying the process was unproven and presented serious issues even at lab scale, the economics of conducting the process at commercial scale are cost prohibitive and the process could not cost effectively utilize a broader range of feedstock than traditional recycling. Defendants further touted the PureCycle management team that claimed to have solved the previously unsolvable polypropylene recycling problem as having “broad experience across plastics,” decades of experience scaling early-stage companies in public markets and having led transformational projects, though they in fact had no background in plastics recycling and previously brought six other early-stage companies public that subsequently imploded, causing substantial investor losses.

In May 2021, Hindenburg Research published a report entitled “PureCycle: The Latest Zero-Revenue ESG SPAC Charade, sponsored by the Worst of Wall Street,” which challenged defendants’ claims regarding the efficacy and safety of PureCycle’s recycling technology and the PureCycle management team’s professional experience. The report quoted PureCycle as claiming, “Up to this point it’s been impossible to recycle plastic into pure, virgin-like form. But here’s the thing. At PureCycle Technologies, the word impossible is not in our vocabulary.”

The Hindenburg Research report emphasized the persistent obstacles that historically stymied efforts to effectively and economically recycle polypropylene, setting the backdrop against which PureCycle claimed to have achieved a previously unattainable feat:

While [Purecycle’s claim] makes for a great sounding “green” story, plastics recycling has been a perpetual challenge from an economic standpoint. The industry has struggled with the economics of even the most basic plastic recycling for decades, as documented in a 2020 NPR exposé titled “How Big Oil Misled The Public Into Believing Plastic Would Be Recycled”.

Within plastics recycling, PP has been particularly uneconomical. PP represents 28% of the world’s plastic, yet currently only ~0.8% of it is recycled today. This is because a sizable amount of PP requires expensive sorting and cleaning due to its use in food packaging. It is also commonly found in products that use mixed plastics that can be difficult to separate. 

The allegations of the Hindenburg Research report caused PureCycle’s stock price to plummet about 40% in a single day, damaging investors. Though PureCycle issued a press release in response to the Hindenburg Research report, defendants did not actually challenge, much less negate, any of the underlying allegations. Just a few months later, defendants revealed that the SEC had issued an investigative subpoena to defendant Otworth “requesting testimony in connection with a non-public, fact-finding investigation of the Company” pertaining to “among other things, statements made in connection with PCT’s technology, financial projections, key supply agreements, and management.”

After nearly three years of hard-fought litigation during which the court denied defendants’ motion to dismiss, with discovery well underway and plaintiffs’ class certification motion pending, the parties agreed to settle the action for $12 million.

“Though we maintain confidence in the strength and merits of the claim, the settlement is an excellent result for the settlement class,” states Tamar. “The all-cash settlement provides certain recovery now, whereas there are sizable risks of recovering any judgment at trial given the complexities of this type of litigation, the company’s tenuous financial condition and the fact that PureCycle has yet to earn any meaningful revenue from its sole product.”

$7.5 Million Settlement for Faraday Investors

By the Editors

On March 18, 2024, the United States District Court for the Central District of California granted final approval of a $7.5 million settlement in a shareholder action against Los Angeles-based luxury electric vehicle company Faraday Future Intelligent Electric, Inc. (“Faraday”). The suit alleged that Faraday misled investors regarding its reservations and financial outlook prior to going public via a de-SPAC merger. Partner Austin P. Van led the litigation, Zhou v. Faraday Future Intelligent Electric Inc., et al., No. 2:21- cv-09914 (C.D. Cal.).

Faraday was formed in 2021 through the de-SPAC merger of the SPAC, Property Solutions Acquisition Corp. (“PSAC”), with FF Intelligent Mobility Global Holdings Ltd., (“Legacy FF”), a private startup electric vehicle company. Legacy FF was founded in 2014 by defendant Yueting Jia, known as “China’s best-known securities fraudster.” On July 21, 2021, with the merger completed, Faraday began publicly trading on the NASDAQ.

Legacy FF first showcased its FF91 – the company’s first production car, at a “very big event in Las Vegas,” in 2017, according to Matthew Lynley of Techcrunch.com, who live-blogged from the event. According to Lynley, “Faraday Future has thus far been very flashy, but has yet to get a product in the hands of consumers — and it needs to get there. But at least part of the way is finally showing a production car, which Faraday Future tried to do with bravado at the event.”

The lawsuit against Faraday stems from the company's assertions regarding its innovative technologies, production capabilities, and market potential, which generated significant investor interest and financial backing. Over time, it became clear that Faraday’s promises were not being met. The company experienced numerous production delays, missed financial targets, and repeatedly postponed the launch of its much-anticipated vehicles. It was later revealed that Faraday had allegedly overstated its production capabilities and the operational readiness of its facilities. Reports revealed that the flagship factory was far from being operational, allegedly contradicting the positive outlook presented by company executives.

Plaintiffs alleged that Faraday wildly misrepresented the level of committed reservations it had for its flagship car by repeatedly telling investors that “its first flagship model, the FF 91, ha[d] received over 14,000 reservations.” In fact, Faraday had obtained only several hundred paid reservations for the FF 91 at the time of these misstatements.

This gross exaggeration was highly material to investors. Under reasonable assumptions using the company’s claimed selling price for the FF 91 of approximately $200,000, Faraday repeatedly claimed in effect that it would achieve revenue of $2.52 billion soon after producing its first vehicle, which overstates by orders of magnitude the approximately $54 million in revenue the company would have achieved from the few hundred paid reservations it actually held. In February 2022, following an internal investigation using outside auditors, Faraday admitted in a report on Form 8-K that:

The Company’s statements leading up to the Business Combination that it had received more than 14,000 reservations for the FF 91 vehicle were potentially misleading because only several hundred of those reservations were paid, while the others (totaling 14,000) were unpaid indications of interest.

That is, Faraday effectively admitted to the core of the securities law violations under Section 14(a) of the Exchange Act and Sections 11 and 15 of the Securities Act pleaded in the complaint.

As stated in plaintiffs’ amended complaint, Faraday also repeatedly misled investors about its ability to bring the FF 91 to market within twelve months of the business combination, i.e., the de-SPAC merger. For example, in soliciting votes in support of the business combination, defendants boasted, “FF . . . is positioned to launch a production try-out in 9 months and commercial production of FF 91 series within 12 months after the Business Combination.”

While the federal securities laws permit a company to be optimistic about its future, they do not permit a company to mislead investors about goals known to be impossible to achieve. During Pomerantz’s litigation, multiple confidential witnesses confirmed that at no point during the class period was Faraday even close to being in a position in its design and manufacturing of the FF 91 to claim that it could bring that model to market within one year of the SPAC merger. That achievement was impossible, and Faraday knew as much. Accordingly, Faraday’s statements that it could bring the FF 91 to market within one year of the de-SPAC merger violated Section 10(b) and 14(a) of the Exchange Act, and Section 11 of the Securities Act.

The truth began to emerge on October 7, 2021, when J Capital Research published a report explaining that Faraday’s claimed 14,000 deposits were likely fabricated, because 78% of those reservations were made by a single undisclosed company that was likely an affiliate. The report further explained that contrary to representations of progress toward manufacturing made by Faraday, former engineering executives did not believe that the car was close to being ready for production.

On November 15, 2021, Faraday disclosed that its board of directors “formed a special committee of independent directors to review allegations of inaccurate disclosures,” including the claims in the J Capital Report. Among other things, the special committee identified “certain inconsistencies in statements to investors and certain weaknesses in its corporate controls and culture, as detailed in the Form 8-K.”

On April 14, 2022, Faraday announced that “additional investigative and remedial work in connection with the independent investigation has now been completed and on April 12, 2022, the Board approved certain additional remedial actions, effective immediately.” In particular, Faraday announced that Jia would be removed as an executive officer, along with other disciplinary actions and terminations of employment with respect to other Faraday employees.

In moving for approval of the settlement, lead plaintiffs told the court, "The settlement provides a substantial recovery to the settlement class despite several obstacles that plaintiffs faced, including the amount of potentially recoverable damages, defendants' potential defenses, defendants' ability to pay a larger amount and the risks of prosecuting this litigation through trial and appeals."

Pomerantz Finalizes Settlement on Behalf of Ginkgo Bioworks Investors

By the Editors

On December 13, 2024, the United States District Court for the Northern District of California granted final approval to a $17.75 million settlement on behalf of investors in a securities class action against Ginkgo Bioworks Holdings, Inc. and several officers of Ginkgo and the predecessor SPAC. It was alleged that Ginkgo and its leadership distorted the company’s finances to gain shareholder approval of a SPAC merger that would take the company public. Joshua B. Silverman and Brian P. O’Connell led the litigation.  Bernstein v. Ginkgo Bioworks Holdings Inc et al., No. 4:21-cv-08943 (N.D. Cal.).

In its SPAC merger filings, which valued Ginkgo at $15 billion, the company stated that it makes money "in much the same way that cloud computing companies charge usage fees for utilization of computing capacity or contract research organizations charge for services."

However, as Lead Plaintiff alleged in her complaint, Ginkgo’s largest outside investors, whose collective stake in the company totaled nearly 43%, provided the overwhelming majority of funds that were then recirculated back to Ginkgo in “round-trip transactions,” in some cases as purported prepayments for Ginkgo's services.

Shareholders overwhelmingly approved the merger between Ginkgo and the SPAC Soaring Eagle. On September 17, 2021, following the merger, shares of Ginkgo’s common stock began trading on the NYSE under the ticker symbol “DNA.”

On October 6, 2021, market research Scorpion Capital released a short-seller report in which it alleged that Ginkgo is a “colossal scam,” describing the company as a “shell game” whose revenue was highly dependent on related party transactions. According to the report, Scorpion Capital based its findings on an “intensive investigation into Ginkgo’s business model and practices, with a particular focus on the related-party entities that drive the bulk of its revenue.”  Another short-seller, Citron, came out with a brief report that same day that largely agreed with Scorpion Capital’s findings. Lead Plaintiff’s complaint alleges that on this news,  Ginkgo’s share price plunged approximately 12%, damaging investors.

A securities lawsuit was filed in November 2021, and Pomerantz was appointed lead counsel on behalf of the proposed class of investors. The case was initially brought as a Section 10(b) action but was expanded in the amended complaint to include Section 11 and Section 14(a) claims. 

A Section 10(b) claim applies to a material misstatement or omission made in connection with the purchase or sale of a security and requires proof of scienter (the intent to deceive). A Section 11 claim specifically targets false or misleading information within a registration statement for a public offering. A Section 14(a) claim focuses on misleading statements made in proxy materials related to shareholder votes.

In March 2023, the district court denied Defendants’ motion to dismiss Lead Plaintiff’s Section 10(b) and 14(a) claims. Importantly, it found that Lead Plaintiff had alleged that the short-seller reports were corrective disclosures. The Court opined that since the Scorpion Capital report involved 21 research interviews encompassing a broad sample of former employees and executives of Ginkgo, as well as individuals who were then employed at its related-party customers, it “provided new information that was not previously reflected in the stock price.”

The Court found that Lead Plaintiff had alleged falsity, noting that “the fact that the company’s primary customers … operated out of Ginkgo’s headquarters, that many listed Ginkgo’s phone number as their own, and that Ginkgo used intertwined employees, managers, and directors to control these ‘customers’ would surely satisfy the falsity requirement given that Defendants disclosed that it lacked control over these entities.”

The Court also sustained Lead Plaintiff’s 14(a) claims, agreeing with Pomerantz’s position that only allegations of a false or misleading statement made with negligence, not scienter, were required.

For Section 11, the Court dismissed Lead Plaintiff’s claims but granted Lead Plaintiff leave to amend the complaint to expressly include the detailed tracing arguments made in the motion to dismiss briefing. The Court noted that it “finds that the assertions made in the opposition would satisfy the registration requirement, so amendment is certainly not futile.” Pomerantz refiled an amended complaint to address the limited portion of the complaint that the Court had dismissed. The Section 11 claims proceeded to discovery along with the Sections 10(b) and 14(a) claims.

The $17.75 million settlement represents a favorable recovery for the class and involved novel legal issues related to SPACs. Additionally, the Pomerantz litigation team secured important rulings in the evolving area of the law concerning short-seller reports.

Pomerantz Saves an NYC Homeless Facility

By the Editors

Pomerantz Senior Counsel Marc I. Gross, a securities class action attorney with a decades-long record of fiercely litigat­ed successes on behalf of defrauded investors, embodies the generous spirit of community service in his pro bono work.

In his latest pro bono action, Marc intervened to provide a lifeline to Mainchance, a longtime midtown Manhattan homeless facility that had been threatened with closure by Mayor Eric Adams. To do so, he and his Pomerantz team filed an Article 78 proceeding – a civil lawsuit in New York State Supreme Court that challenges the legality of a New York State agency or official’s actions.

For over 35 years, Mainchance has operated a vital 24/7 Drop-In Center and food pantry in midtown. Drop-In Centers offer homeless individuals a place to sleep overnight on a first-come-first-served basis, along with meals, showers, medical services, and housing counseling. In the last year, over 45,000 visits were made to the facility. Drop-In Centers provide an alternative to shelters, which offer longer stays, to which many homeless individuals are resistant.

Despite receiving high ratings for its performance of essen­tial services, as well as maintaining partnerships with local institutions like NYU Langone and Baruch College, Main­chance was told in January 2024 that the NYC Department of Homeless Services (“DHS”), which funds its operation, was terminating Mainchance’s contract on June 30, 2024, two years before its expiration. No explanation was provided.

At the time, Marc was a volunteer at Mainchance’s Food Pantry and a member of its Board of Directors. Faced with the demise of what he knew to be a much-needed midtown institution and the loss of more than 30 jobs, Marc tapped Pomerantz associate Stephanie Weaver, paralegal Simon Hall, and legal assistant Taryn Sayre to help him fight the proverbial battle with City Hall.

At the outset, the task seemed especially daunting, given that Mainchance’s contract allowed the City to cancel at any time “without cause.” Undaunted, the Pomerantz team pressed DHS to provide reasons for the premature termi­nation. At a City Council hearing in April, the DHS Deputy Commissioner said that Mainchance was “underperforming.”

Pomerantz thereupon filed an administrative Notice of Dispute, challenging that characterization as contrary to DHS’ periodic audit reports. DHS formally responded by letter, acknowledging that Mainchance had not underper­formed, and indeed had benefited the neighborhood, but that the agency had decided to move away from the Drop-In Center model to a Safe Haven model. The major difference between the two models is that Safe Havens provide home­less individuals with beds rather than chairs to sleep in over­night. Mainchance responded by applauding the purported policy change and pointing out that it had already submitted a proposal to convert to a Safe Haven. It seemed suspect that, two days before advising Mainchance in writing that it was being terminated because the DHS was moving away from the Drop-In Center model, a DHS spokesperson had touted the Adams administrator’s investment in Drop-In Centers, including one scheduled to be opened this summer, while also acknowledging that Mainchance was the only Drop-In Center the agency had decided to terminate.

Faced with the looming June 30th deadline, Pomerantz filed a petition and a motion for an injunction on June 10, 2024. Fortunately, the Court promptly scheduled a hearing for June 23, after which it entered a temporary restraining order compelling continued funding until a full hearing could be held on July 23, 2024. Marc explained, “As strong as the facts appeared, we had to overcome the high hurdle of the contractual language, which clearly stated that the City could cancel the contract without cause.”

Pomerantz argued that despite this clause (which is standard and adhesive), any government agency decision is subject to court review if it is an “abuse of discretion,” arbitrary or clearly unreasonable (which are the standards for NYS Article 78 claims). This made sense given the exceptional power of governments relative to private contractors. In this case, the decision to terminate was particularly egregious given the homeless clients’ NYS Constitutional Right to Shelter. New York State case law is unsettled on this issue, with some courts holding that the contract language pre-empts any claims under Article 78, which allows proceed­ings to challenge decisions made by state and local govern­ments, while other courts hold that Article 78’s “arbitrary and capricious” standard pre-empts the contractual language.

Fortunately for Mainchance and its clients, Judge Lynn R. Kotler acknowledged that the closure of any shelter in the midst of a homeless crisis made little policy sense, and that the circumstances in this case clearly failed to meet the rea­sonableness standard. On September 19, 2024, the Court handed down a decision and order permanently barring ter­mination of the Mainchance contract prior to its expiration in June 2026.

In light of recent allegations that have surfaced against Mayor Adams, it is possible that the reason he chose to close this particular homeless facility is that is next door to a new, luxury high-rise hotel owned by Turkish business interests. The hotel was built by a Turkish construction company with offices in Brooklyn whose employees made donations to Mayor Adams’ political campaigns. Time will tell whether these entities and individuals are the same donors referenced in the recent indictment of the Mayor. In the meantime, Pomerantz is proud to have fought to save Mainchance, allowing it to continue providing important services to the New Yorkers who need them most.

Betting Against the House and Wynn-ing

 By Murielle Steven Walsh

After six years of fiercely contested litigation, Pomerantz achieved a $70 million settlement with defendants in a securities class action against Wynn Resorts Ltd. and several of its officers. This is one of the largest – if not the largest – settlements to date of Section 10b-5 claims arising solely from #MeToo allegations.

Wynn Resorts owns and operates luxury hotels and des­tination casino resorts, including Wynn Las Vegas and Encore in Las Vegas, Nevada; Wynn Boston Harbor in Everett, Massachusetts; and Wynn Macau and Wynn Palace in Macau, China.

Briefly, the case arises from a decades-long pattern of sexual abuse and harassment by the company’s billion­aire founder and former Chief Executive Officer, Stephen (Steve) Wynn that was unchecked, tacitly permitted, and eventually covered up by defendants. In March 2016, Elaine Wynn, Steve Wynn’s ex-wife and co-founder of Wynn Resorts, claimed in a legal filing in a separate litiga­tion that Mr. Wynn had engaged in “serious misconduct” against at least one employee on company property, that the company’s general counsel knew about it and helped to cover it up, and that this information had not been disclosed to the company’s gaming regulators.

The same day, the company issued a press release vehemently denying Ms. Wynn’s allegations and stating that any suggestion that Wynn Resorts had concealed information from its regulators was “patently false.”

Almost two years later, in January 2018, the Wall Street Journal published an article exposing allegations of sexu­al abuse against Mr. Wynn, including that he had paid an employee $7.5 million dollars to settle her claim of being raped by him in 2005. The WSJ article was based on interviews with dozens of Wynn Resorts employees and others who “described a CEO who sexualized his workplace and pressured workers to perform sex acts.” They also noted Mr. Wynn’s power, including his growing political profile. “After Mr. Trump’s 2016 election, Mr. Wynn became the Republican National Committee’s finance chairman.” Wynn’s Resorts’ stock price tanked over 10% in response to the WSJ article’s allegations.

The company issued another statement that day claim­ing that the WSJ article had been instigated by Ms. Wynn, that the company had a hotline for fielding com­plaints about such conduct, and that no one had ever submitted a complaint about Mr. Wynn to that hotline, which falsely implied that no complaints had ever been made about him. Two weeks later, the Las Vegas Metropolitan Police Depart­ment disclosed that it had received two additional complaints about Mr. Wynn. The stock price again declined.

Gaming regulators in Nevada and Massachusetts immediately opened an investigation into the WSJ article’s allegations, which they ultimately con-firmed through interviews with company personnel and Wynn Resorts’ own internal documents. The company admitted to having failed to investigate and report known complaints about Mr. Wynn’s alleged misconduct. Mr. Wynn eventually stepped down.

This case had numerous twists and turns from the outset. We filed our First Amended Complaint in March 2019, but the district court dismissed the claims, granting us leave to amend. Several months after dismissing the case, the district court judge recused herself without explanation, and a new judge was assigned – Judge Andrew Gordon.

We filed our Second Amended Complaint in July 2020, and in July 2021, Judge Gordon upheld the claims regarding the 2016 press release referenced above by the company denying any misconduct by Mr. Wynn, as well as two other public statements issued by the company and Mr. Wynn denying the Wall Street Journal’s allegations and claiming that the company “had a hotline in place for reporting harassment and similar misconduct.”

“[T]he plaintiffs have sufficiently alleged that [defendants] were aware of information contradicting their statements that denied misconduct allegations,” held Judge Andrew P. Gordon. “The inference that these defendants were aware of Wynn’s alleged misconduct at the time of their statements is cogent and compelling.”

Then, just as discovery was beginning and we were set to go after the defendants for their internal documents which we knew would incriminate them, the presiding Magistrate Judge recused himself from the case (again without explanation). The case was randomly assigned to Magistrate Judge Elayna Youchah.

Unbeknownst to us at the time, Judge Youchah had previously represented Wynn Las Vegas and Wynn Resorts as defendants in a federal lawsuit filed by Angelica Limcaco. Ms. Limcaco’s allegations arose from some of the same allegations at issue in our case. She alleged that while she was a salon manager at Wynn Las Vegas, one of the salon manicurists told Ms. Limcaco that Mr. Wynn had raped and impregnated her, and that she was reprimanded and eventually fired after she reported the alleged rape to Wynn Resorts’ human resources department. The alleged rape victim Ms. Limcaco referred to was the same employee mentioned in the explosive WSJ article.

Judge Youchah did not divulge this prior representation to us. Meanwhile, defendants requested that the court bifurcate discovery (i.e., split discovery into two stages – class certification discovery and then merits discovery only if class certification was granted). Judge Youchah granted their request, which significantly delayed the time by which defendants would have to hand over the damaging documents that we needed to prove our case.

Thereafter, we discovered Judge Youchah’s prior repre­sentation of Wynn. Out of an abundance of caution, we promptly filed a motion for recusal pursuant to 28 U.S.C. § 455(b)(2) which requires federal judges, including magistrates, to recuse themselves from any case where “in private practice [s]he served as lawyer in the matter in controversy.” Section 455(b) separately provides that a judge shall also disqualify herself in any proceeding where: “(1) [s]he has a personal bias or prejudice con­cerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding,” or “(2) in private practice [s]he served as lawyer in the matter in controversy, or a lawyer with whom [s]he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it.”

On October 27, 2022, Magistrate Judge Youchah recused herself from Wynn, and Magistrate Brenda Weksler was assigned to the case. All told, six judges recused them­selves from the case over the course of the litigation.

On March 2, 2023, Judge Gordon granted our motion for class certification. This was a critical win in the case because defendants had hoped to cut our class period in order to limit their damages by hundreds of millions of dollars. Defendants attempted to capitalize on the defendant-friendly Supreme Court ruling in 2021, Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 594 U.S. 113 (2021), where the Court held that plaintiffs cannot certify a class unless they can show a match between the alleged misstatements and the cor­rective disclosure. Accordingly, defendants argued that there is a “mismatch” between the company’s general denials of misconduct and the more specific disclosures contained in the WSJ article. The court rightly agreed with us, however, noting that a corrective disclosure need not be a mirror image of the prior fraudulent statements, and that it is sufficient that the disclosure renders “some aspect” of the prior statements false or misleading. This decision is one of the first plaintiffs’ wins in the post Goldman world.

Even though we now had a green light on merits discov­ery, defendants fought us relentlessly on producing any documents of substance. Meanwhile, they filed a highly premature motion for summary judgment, which again tried to knock out the corrective disclosure that held hun­dreds of millions of dollars in damages. We countered by asking the court to deny defendants’ motion because they still had not produced the documents needed to de­cide the motion. At the same time, we moved to compel the defendants to produce the relevant documents.

We won on both counts. First, the new magistrate judge granted in large part our motion to compel. A few days later, the district court denied the defendants’ motion for summary judgment and forbade them from refiling it until they had produced all the discovery we were lack­ing. Shortly after these two significant wins, the parties mediated and achieved the highly favorable $70 million settlement.

According to Partner Murielle Steven Walsh, who leads the case, there are two important takeaways. “First,” she says, “it serves as a warning to corporations and their officers that talk is not, in fact, cheap. Investors care about corporate integrity and accountability, and companies that are accused of making statements to cover up or deny allegations of serious misconduct by executives face a potentially steep financial reckoning. Second, don’t give up the good fight even when the odds seem stacked against you. Eventually, justice will prevail.”

The case is Ferris v. Wynn Resorts Ltd., No. 2:18-cv-00479 (D. Nev.).

Pomerantz Settles Case Alleging “Dark Practices”

By Jonathan D. Park

On August 26, 2024, Pomerantz secured preliminary ap­proval of a $3.6 million settlement in a securities class action against Global Payments, Inc. (“GPN”) in the United States District Court for the Northern District of Georgia. The case was initially filed after the federal Con­sumer Financial Protection Bureau (“CFPB”) sued GPN’s wholly owned subsidiary, Active Network, LLC (“Active Network”), for alleged deceptive practices in violation of federal consumer protection law.

GPN is a payments technology company that provides software and services to merchants and financial insti­tutions. Active Network provides registration and pay­ment processing services to organizers of events such as summer camps and athletic competitions. Many such organizers, rather than building their own registration and payment infrastructure, contract with a vendor like Active Network. In such a case, when an individual registers for that organizer’s event, they are directed to a webpage built by Active Network to complete the process. Active Network collects the consumer’s payment data (such as a credit card number) and retains a portion of the pay­ment pursuant to its contract with the organizer.

Active Network also has a “discount membership club” called “Active Advantage.” In return for an annual fee, Active Advantage members can redeem discounts for processing fees, beer and wine tastings, sports apparel, flowers, travel, lodging, and race registrations.

Active Network allegedly employed two practices, “dark patterns” and “negative options,” that deceived consum­ers into enrolling in Active Advantage. According to the CFPB, dark patterns are design features that deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent, and negative options are terms and condi­tions under which a seller interprets a consumer’s silence or failure to reject or cancel an agreement or service as acceptance of an offer. The CFPB has warned that these may violate consumer protection laws.

Drawing on the CFPB’s allegations and other sources, Pomerantz’s clients alleged that Active Network de­signed its online registration and payment process to deceive consumers into unknowingly accepting “insert­ed offers” to enroll in Active Advantage in the process of registering for events, and that those trial memberships were automatically converted to paid memberships when the unknowing consumers failed to cancel before the trial period ended.

Prior to being acquired by GPN in 2017, Active Network was repeatedly accused of such practices. For instance, the attorneys general of Iowa and Vermont, as well as district attorneys in California, brought cases against the company under consumer protection laws, which Active Network settled. Active Network also settled a consumer class action with similar allegations only months before the GPN acquisition.

Nevertheless, after acquiring Active Network, GPN stated in SEC filings that it was “currently in compliance with existing legal and regulatory requirements.” GPN and its senior officers also touted Active Network’s performance without disclosing that it reflected Active Advantage membership fees charged to unsuspecting consumers.

The CFPB’s action, filed in October 2022, included de­tailed allegations indicating that the defendants’ state­ments were false. After conducting an investigation— which GPN did not disclose—the CFPB alleged that Active Network continued to deceive consumers into accepting the inserted offer for Active Advantage mem­bership, that consumers enrolled in Active Advantage redeemed only 2.8% of the fees they paid, indicating that consumers were unaware of their enrollment (and lead­ing one senior manager to call the program “pure profit” in an internal email), and that Active Network generated over $300 million in fees from Active Advantage since 2011. Pomerantz investigated and uncovered numerous former Active Network employees who corroborated these allegations and alleged that these issues were well known at the company.

After the court largely denied the defendants’ motion to dismiss, the parties began the discovery process and agreed to settle the case soon thereafter. For its part, the CFPB action was stayed shortly after it was filed, in light of the United States Court of Appeals for the Fifth Circuit’s ruling that the CFPB’s funding authority was unconstitutional. After the Supreme Court reversed that decision, the stay of the CFPB’s action was lifted, and that case is now pending.

“AI Washing” – The New Deceptive Marketing Technique

By Zachary Denver

Artificial intelligence, or AI—technology that enables computers to mimic human learning, comprehension, problem solving, and/or decision making—is the “new” hot thing. The trend is driven by innovation in so-called “generative AI”: text, image, audio, and video generating computer programs able to utilize vast data sets to create realistic looking and sounding output. Many imagine that AI first stormed the world in November 2022 with the launch of ChatGPT, but AI tools have been around for years. IBM’s Watson AI system crushed its human competitors on Jeopardy! over thirteen years ago. But with this latest generation of generative AI, every company wants a role in the AI revolution. With this increased desirability, it seems that suddenly every­thing is being advertised as being powered by AI, even when it isn’t.

AI hype has led to a deceptive marketing practice called “AI washing.” Similar to “green washing” – exaggerating positive environmental impact to distract the public or investors from less flattering news – AI washing exag­gerates a company’s effective use of AI technology in its products or operations. AI washing is intended to make a company appear more sophisticated or technologically advanced than it really is by linking it to the technological trend of the moment.

AI washing can take different forms. A company could outright lie about the existence of AI in its products, ex­aggerate AI’s impact on the business or its capabilities, or falsely suggest a new AI system can out-perform existing, non-AI products or systems. AI washing can also involve exaggerating a new AI operation’s sustainability or sug­gesting that AI represents a new direction when its use in a given situation is just a gimmick. AI technology requires massive computing power and data storage as well as up-to-date data sets to feed the algorithm, all of which are costly. It is equally AI washing for a company to tout its new AI system without acknowledging those costs.

Even the largest corporations engage in practices that could be considered AI washing. Amazon has faced ac­cusations of AI washing for its Just Walk Out Program. For Just Walk Out, Amazon publicized an AI-powered system that allowed Amazon Fresh and Amazon Go shoppers to pick up their items and leave without paying because the AI-backed sensors would identify items chosen and bill customers automatically. Pitching the service as an AI play raised Just Walk Out’s profile, but also hid the fact, reported earlier this year, that Amazon needed around 1,000 workers in India to manually check almost three-quarters of transactions. Amazon denied the reports but did admit that the Indian workers were reviewing the system. The takeaway is that Just Walk Out used AI, but not as effectively as Amazon suggested.

The SEC Moves to Clean Up AI Fraud

The Securities and Exchange Commission has taken action on AI washing in moves that portend future scrutiny of the practice. In March 2024, the SEC announced it had settled charges against two investment advisors, Delphia (USA), Inc. and Global Predictions, Inc., for making false and misleading statements about their purported use of artificial intelligence. The firms settled for $225,000 and $175,000 respectively. According to the SEC, both firms were marketing to clients that they were using AI in ways they were not. SEC Chair Gary Gensler warned about false claims concerning AI use. In the press release an­nouncing the settlement, the outgoing Director of SEC’s Division of Enforcement, Gurbir Grewal, while indicating that the Commission would be focused on AI washing in the financial services industry, stated, “[W]e are com­mitted to protecting [investors] against those engaged in ‘AI washing.’”

In June 2024, the SEC followed up with an AI washing charge against an issuer, charging the CEO and founder of AI startup Joonko Diversity, Inc., Ilit Raz, with defraud­ing investors. According to the complaint, Ms. Raz mar­keted Joonko as a technology platform using AI to match customer firms with diverse job candidates to help clients achieve Diversity, Equity, and Inclusion goals, when in reality the platform did not function as Ms. Raz claimed at all. In a press release announcing the complaint, Mr. Grewal called the case “an old school fraud using new school buzzwords like artificial intelligence and automation.” He promised continued policing “against AI-washing and the type of misconduct alleged in to­day’s complaint.”

Chairman Gensler has commented on this topic before. In prepared remarks to Yale Law School in February 2024 on AI more generally, the SEC Chair called out the potential for AI washing and offered advice to those making public statements: “If a company is raising money from the public, though, it needs to be truthful about its use of AI and associated risk.” He continued, “AI washing, whether it’s by companies raising money or financial intermediaries, such as investment advisers and broker-dealers, may violate the securities laws.” Recently, on an episode of his YouTube show “Office Hours,” Mr. Gensler once again warned about AI wash­ing, signaling a further crackdown. He broadened the focus to discuss registrant filings, explaining that com­panies should consider whether AI discussions might be material to investors. Clearly, the SEC will stay focused on this problem.

Investors Won’t Be Left Out to Dry

In addition to SEC scrutiny, AI washing is already gener­ating private securities fraud cases under the Exchange Act and Securities Act. Indeed, in 2024, investors brought at least eight prominent AI washing cases alleg­ing Exchange Act claims.

One prominent example is D’Agostino v. Innodata Inc., et al., No. 2:24-cv-00971 (D.N.J.), where shareholders of Innodata Inc., a global data engineering company focus­ing on AI, allege that Innodata made false claims about its “proprietary, state-of-the-art” “core AI technology stack,” when in reality Innodata lacked viable AI technology, its platform was a rudimentary software, Innodata was not going to meaningfully use AI for new contracts, and it was not effectively investing in research and develop­ment for AI. According to the plaintiffs in the Innodata suit, the truth emerged in a short seller report exposing the company’s AI washing practices.

In Hoare v. Oddity Tech Ltd. et al., No. 1:24-cv-06571 (S.D.N.Y.), shareholders of Oddity, a consumer tech platform that uses AI to identify customer needs and solutions in the beauty and wellness products space, allege that the company overstated its AI technology and capabilities, and the extent to which that tech-nology drove sales. According to the suit, the truth emerged in a short seller report describing discussions with former employees who called the company’s AI “nothing but a questionnaire.”

More litigation seems inevitable as public companies rush to tout their ultimately ephemeral AI-integration and products. Further suits could be driven by companies that include AI disclosures in their public filings without adequately disclosing risk, thus creating the impression of AI usage that materially differs from reality. Chairman Gensler has already hinted that generic risk disclosures for AI will not suffice. In his prepared remarks to Yale, he said “investors benefit from disclosures particularized to the company, not from boilerplate language.”

Section 11 claims under the Securities Act for AI wash­ing in a registration statement may be even more common than Exchange Act Section 10(b) claims. For any startup, the need to appear cutting-edge is powerful, and companies may be tempted to exaggerate AI tools that are actually incidental to the product. Additionally, legitimate technology startups trying to innovate in AI may misstate their readiness to incorporate the tools or overstate what they can do. This is already a prob­lem. According to a 2019 report by tech investment firm, MMC Ventures, 40% of new tech firms that described themselves as “AI start-ups” in fact used virtually no AI at all.

AI washing may be an emerging problem for investors, but as its moniker suggests, it is just another form of misleading customers and investors: an old school fraud using new school buzzwords. The securities laws apply to the new as well as the old.

Pomerantz Achieves Settlement with Emergent BioSolutions

By the Editors

In 2021, biopharma company Emergent BioSolutions was at the center of a scandal that shook investor trust. With a Baltimore facility pre-certified to produce pandemic vaccines, Emergent signed over $1.5 billion in contracts with Johnson & Johnson, AstraZeneca, and the U.S. government to produce desperately needed bulk drug substance for COVID-19 vaccines at the height of the pandemic. Emergent’s executives assured investors of their readiness, touting their facility’s ability to manufacture vaccines at commercial scale. But in March 2021, media outlets reported that employees had mixed up ingredients, cross-contaminating millions of dose-equivalents of J&J’s vaccine with AstraZeneca material. These reports also detailed a broader history of quality control issues at the Baltimore plant, including contamination risks and inadequate employee training. After Emergent’s executives denied that cross-contamination occurred, claiming that only one batch of vaccine drug substance was discarded, Emergent’s stock cratered as more batches were destroyed, the government took operational control of the Baltimore facility away from Emergent, and COVID-19 vaccine production was ended. A Congressional investigation revealed that 400 million dose-equivalents out of 500 million produced by Emergent were destroyed.

Pomerantz pursued a securities class action against Emergent, alleging that it misled investors by concealing significant manufacturing issues at its Baltimore facility and misrepresenting the facility’s readiness, and the scope of the problems.

Pomerantz recently secured preliminary approval of a $40 million settlement for defrauded Emergent investors. Led by Pomerantz Partner Matthew L. Tuccillo, the litigation highlights the critical importance of transparency and accountability in the biopharma industry, where investor trust and consumer safety are paramount.

Pomerantz Holds London Corporate Governance Roundtable With Sir Tony Blair

by the Editors

Ten years ago, Pomerantz decided to gather a small group of institutional investors to share ideas and concerns regarding the funds these investors represent. Over the past decade, the original gathering of 5-6 institutional investors gradually grew to over 75 participants, becoming the Firm’s marquee event for investors:  Pomerantz’s Corporate Governance Roundtable. On June 18th, 2024, for the first time, the Roundtable was held outside the United States, with over 100 institutional investors, corporate governance professionals, and investment experts from all over the world attending a full-day conference in London, the UK. The program featured topics ranging from AI to greenwashing to securities litigation. The day’s highlight was a keynote interview by Pomerantz Managing Partner, Jeremy A. Lieberman, with former British Prime Minister, Sir Tony Blair, who provided an insightful assessment of the current state of global affairs.

“The response was phenomenal,” says Pomerantz Partner and Head of Client Services, Jennifer Pafiti, who played a leading role in organizing the Roundtable. “The feedback we have received over the years is that institutional investors consider these events crucial for keeping pension professionals connected and educated on real-time matters that affect the value of the funds they represent.” Held at Landing 42, the UK’s highest event space in the heart of the London’s financial hub, the theme of this year’s conference was “Lessons Learned from Corporate Governance Failures.” “Hearing insight and discussion from the most expert governance professionals in the world was fascinating,” adds Pafiti, “both in terms of their presentations and the dialog with the audience.”

One of the issues discussed was the challenges that pension fund investors face from so-called “greenwashing,” which refers to the practice by companies or fund managers of making unfounded claims about their organizations’ environmental responsibility initiatives. A panel dedicated to the subject at the Roundtable suggested that although regulation can provide important guardrails for issuers, there is no substitute for effective due diligence and scrutiny by pension funds of the information that is provided. The challenge will be to find the right balance between encouraging disclosure of ESG related matters and ensuring that the information is evidence-based and reliable. “It would be in no one’s interests if the result of exposing greenwashing activity that has taken place would be a reluctance by issuers, in particular, to disclose any information other than that which is mandatory,” says Dr. Daniel Summerfield, Pomerantz’s Director of ESG and UK Client Services, who helped organize the conference with Pafiti. “Disclosure of ESG needs to become an authentic endeavor by all parties.”

A recurring theme in discussions at the conference was that, with the benefit of hindsight, many of the causes of previous instances of corporate malfeasance were hiding in plain sight but were ignored or excused as an inconvenient truth. While securities litigation can act as an important backstop and deterrent as well as as a way to secure compensation for investors and put in place corporate governance reforms, it should not be seen as a panacea. Conference attendees agreed that there is no substitute for investor scrutiny of corporate governance and effective engagement and stewardship. An important consideration was paraphrased by one panelist as the need to ensure that we can turn hindsight into foresight to provide more insight.

“Having been involved in several Pomerantz roundtables over the years, I believe that this was the most successful one to date owing to the caliber of speakers, diversity of delegates and the rich and relevant content, as well as the  keynote address by Sir Tony Blair,” offers Summerfield. “Holding the event overseas for the first time was a strategic decision reflecting the internationalization of our client base as a result an increased interest in securities litigation among global investors. The choice of sessions at the Roundtable  was responsive to the key issues which are of concern to our U.S. and international clients. Our Roundtables are part of our series of global educational and networking events – albeit at a larger scale – that we regularly host in different countries to cater to the increase in demand and interest in the services we provide.”

Adrian Wilkes, Deputy Head of Investments Legal and Tanya Bagley, Head of Investments and Markets Legal, both of Brightwell Pensions  (formerly known as BT Pension Management), UK, participated in the London Roundtable. Reflecting on it afterwards, they jointly expressed:

 “We always find Pomerantz events to be highly informative and enjoyable, and the 2024 Corporate Governance Roundtable was no exception.  The quality and range of the speakers and sessions was impressive, and we really value the insights afforded by hearing the experience and thoughts of both UK and international peers on highly relevant topics – as well as the opportunity to catch up with familiar faces and meet new ones.  An excellent event altogether – many thanks!”

As far back as 2007, the TIAA-CREF Institute asserted that the primary actors promoting changes in corporate governance systems are often foreign. “What has become increasingly apparent and was noted at the Roundtable,” explains Summerfield, “is that with the globalization of investors’ portfolios, we need to learn from the experiences of domestic investors based in the markets in which we now invest. The utilization of alternative engagement tools may also be required as investors diversify their risks and increase their exposure to different markets which may not have the same level of corporate governance standards.”

With a potential regulatory race to the bottom as stock exchanges compete for IPOs – a topic which was also discussed at the roundtable – business as usual may no longer be appropriate in holding investee companies to account. Pomerantz stands ready to support our clients as they manage these additional risks in an increasingly volatile and uncertain world.

Supreme Court Further Curtails Power of Administrative Agencies

By Michael Grunfeld

On June 28, 2024, in Loper Bright Enterprises v. Raimondo, the Supreme Court overruled the 40-year-old precedent set in Chevron v. Natural Resources Defense Council. In Chevron, the Court had ruled that when administrative agencies implement ambiguous statutory provisions, courts must defer to the agency’s interpretation as long as it is reasonable. Loper Bright extends the Court’s recent trend of limiting the power of administrative agencies to regulate as they see fit and its continued overturning of significant precedents. This decision opens the door to a flurry of new cases challenging agency interpretations of statutory provisions that likely would have received deference under Chevron.

Administrative, or regulatory, agencies are located in the Executive Branch of the federal government and are tasked with implementing statutes within their purview passed by Congress. These agencies—such as the Securities and Exchange Commission, Federal Trade Commission, and Environmental Protection Agency, among others—cover a wide range of areas.

In Loper Bright, the Supreme Court ruled that “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” This ruling was based on the power of judicial review set out in Marbury v. Madison in 1803, which provided “[i]t is emphatically the province and duty of the judicial department to say what the law is.” The Court reasoned that statutes dealing with regulatory agencies are no different than other types of statutes, where “courts use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity. . . . It therefore makes no sense to speak of a ‘permissible’ interpretation that is not the one the court, after applying all relevant interpretive tools, concludes is best.” In addition, the Court based its ruling on its interpretation of the Administrative Procedure Act (APA), which sets out the procedures that apply to administrative agencies. The Court ruled that the APA’s provision for judicial review of agency action codifies “that courts, not agencies, will decide ‘all relevant questions of law’ arising on review of agency action” and “set aside any such action inconsistent with the law as they interpret it.” Lastly, the Court explained why the principle of stare decisis—or adherence to precedent—did not preclude overruling Chevron, including the majority’s view that Chevron’s reasoning was flawed and that it was “unworkable” in practice.

Justice Elena Kagan penned a forceful dissenting opinion, joined by Justices Sotomayor and Jackson, that she took the unusual step of summarizing from the bench to emphasize the extent of her disagreement with the majority’s decision. She explained that the Court’s decision “will cause a massive shock to the legal system, ‘casting doubt on many settled constructions’ of statutes and threatening the interests of many parties who have relied on them for years.” In addition, she explained that Chevron made sense because:

Some interpretive issues arising in the regulatory context involve scientific or technical subject matter. Agencies have expertise in those areas; courts do not. . . . And some present policy choices, including trade-offs between competing goods. Agencies report to a President, who in turn answers to the public for his policy calls; courts have no such accountability.

Moreover, Justice Kagan criticized the majority for putting “courts at the apex of the administrative process as to every conceivable subject,” such as on issues related to climate change, health care, the financial system, transportation, and artificial intelligence. She cautioned: “In every sphere of current or future federal regulation, expect courts from now on to play a commanding role. It is not a role Congress has given to them, in the APA or any other statute. It is a role this Court has now claimed for itself.”

Justice Kagan explained that deferring to the reasonable interpretations of agencies is consistent with the judicial power to interpret the law because Chevron was simply based on a “presumption—really, a default rule—for what should happen” when a statute is ambiguous: that “Congress would select the agency it has put in control of a regulatory scheme to exercise the ‘degree of discretion’ that the statute’s lack of clarity or completeness allows.” Justice Kagan noted that “presumptions of this kind are common in the law,” that the APA’s provision for judicial review does not specify what standard of review should be applied, and Chevron deference does not contradict “how judicial review operated in the years leading up to” and following the enactment of the APA.

Furthermore, Justice Kagan was highly critical of the majority’s failure to adhere to stare decisis. She explained that far from being the type of situation that warrants overruling, “Chevron is entitled to a particularly strong form of stare decisis” because “Congress has kept Chevron as is for 40 years” despite having had ample opportunity to limit it, the case has been cited in over 18,000 federal-court decisions, and it has had a “powerful constraining effect on partisanship in judicial decision-making.”

Rather, Justice Kagan described the decision as rooted in “the majority’s belief that Chevron . . . gave agencies too much power and courts not enough. But shifting views about the worth of regulatory actors and their work do not justify overhauling a cornerstone of administrative law. In that sense too, today’s majority has lost sight of its proper role.”

Justice Kagan placed the Court’s decision in the pattern of its recent “treatment of agencies” and “its treatment of precedent.” The decision was “yet another example” of “the Court’s resolve to roll back agency authority, despite congressional direction to the contrary.” Another example came just this term in SEC v. Jarkesy, where the Court ruled that the SEC’s use of in-house tribunals—as opposed to courts—to seek civil penalties from defendants for securities fraud is unconstitutional. As for stare decisis, Justice Kagan cited her “own dissents to this Court’s reversals of settled law” that “by now fill a small volume”—including the Court’s overruling of Roe v. Wade in Dobbs v. Jackson Women’s Health Organization. Justice Kagan therefore described the majority’s decision as a case where a “rule of judicial humility gives way to a rule of judicial hubris. In recent years, this Court has too often taken for itself decision-making authority Congress assigned to agencies.”

Loper Bright portends an onslaught of new cases challenging how agencies implement federal statutes, where judges will exert independent review and not be required to defer to expert agency interpretations of statutory ambiguities. There are, however, several important limitations to the Court’s decision. The majority stated that prior decisions cannot now be overruled merely because they relied on Chevron. (Justice Kagan, however, was concerned that “Courts motivated to overrule an old Chevron-based decision can always come up with something to label a ‘special justification’” to support overruling. “All a court need do is look to today’s opinion to see how it is done.”)

In addition, Loper Bright applies only where a statute is deemed to be ambiguous, but not where a court determines that the statute itself is clear. The decision also does not apply to agency policymaking and fact-finding, which are still accorded substantial deference. Moreover, this decision applies only where the statute is silent as to who should interpret the provision at issue. Congress may still expressly delegate to administrative agencies the power to interpret statutory provisions. These qualifications may be of little comfort to regulators—and the public that relies on them—in cases where newly empowered courts reject agency interpretations that would have been deemed reasonable under Chevron. Even so, agencies may try to alleviate such results by providing as fulsome explanations as possible for their decisions, Congress may try to do so through the legislative process, and litigants may marshal arguments as to why a court should adopt an agency’s interpretation as the best understanding of the statute at issue.

Section 12 and Fundraising Via Digital Assets

By Genc Arifi

Whenever law and a new technology collide, courts either analyze the statute and case law and arrive at an updated interpretation that fits the new invention, or they invite Congress to enact new rules to provide guidance. With the advent of blockchain technology and its financial side-kick cryptocurrency, courts have adopted the former approach, taking it upon themselves to provide guidance on how statute and case law apply to the particular nuances of the new technology. Section 12 of the Securities Act has provided relief to purchasers of traditional securities from unscrupulous sellers since its inception almost 100 years ago. Now, in the absence of new statutes, courts are increasingly relying on Section 12 to interpret the meaning of the term “seller” within the new and ever-evolving cryptocurrency ecosystem and within the larger universe of social media, impacting who may be held liable for providing misleading information about a security or other investment vehicle.

Blockchain and Cryptocurrency – a primer

Blockchain is a decentralized, distributed ledger technology that records transactions across many computers so that registered transactions cannot be altered retroactively. Cryptocurrency is a digital currency operating on the blockchain. While all cryptocurrencies are built on blockchain technology, not all blockchain applications involve cryptocurrencies. One of the main features of blockchain technology is the decentralization of networks, meaning that no single entity has control over the network.

For this article, it will be assumed that all cryptocurrencies mentioned fall under the securities umbrella. However, the decentralization analysis will eventually become pivotal in determining whether a cryptocurrency is classified as a security, whether via a new interpretation of the Howey Test, which lays out the four criteria an asset must meet to qualify as an investment contract, or through legislative rulemaking.

Section 12 of the Securities Act – who is a seller?

Section 12(a)(1) of the Securities Act creates a private right of action for a purchaser against the seller in any transaction that violates Sections 5(a) or (c) and includes the right to sue for damages or rescission. Section 12(a)(2) creates liability for misleading statements in “a prospectus or oral communication.”

The Supreme Court in Pinter v. Dahl defined a “statutory seller” as someone who (1) “successfully solicits the purchase [of a security], motivated at least in part by a desire to serve [its] own financial interests or those of the securities’ owner” or (2) passes title, or other interest in the security, to the buyer for value.

Solicitation – the rise of social media

Cryptocurrency and other investment projects promoted on social media are challenging the definition of “seller” under Section 12 of the Securities Act. Lower courts have begun to issue rulings determining whether online videos promoting crypto tokens constitute “solicitations that make someone a seller.” However, varying interpretations by lower courts have created uncertainty for investment firms regarding what they can promote online without risking legal action.

For example, the first SEC enforcement actions focused on celebrities who took to social media to advertise Initial Coin Offerings (“ICOs”) without disclosing that they had been paid for their promotion of the tokens. World-renowned boxer Floyd Mayweather, Jr. and music personality DJ Khaled were found to have violated the Securities Act for touting ICOs and failing to disclose that they had been paid do so.

More recently, in October 2023, the Supreme Court declined to grant certiorari for a case involving Cardone Capital LLC, a real estate management company, after a California district court ruled that the CEO of Cardone Capital was not a “seller.”  The plaintiff alleged a violation of § 12(a)(2) and claimed that the CEO made “untrue statements of material fact or concealed or failed to disclose material facts in Instagram posts and a YouTube video in 2019” where the CEO stated that, “it doesn’t matter whether the investor is accredited or non-accredited … you’re gonna walk away with a 15% annualized return….” The district court noted that the CEO was not a seller under the first prong of the Pinter test, as title was not passed, and further, Cardone was not found to be a “seller” under the second prong because the “plaintiff never alleged that [the CEO] or Cardone Capital was directly and actively involved in soliciting Plaintiff’s investment, nor that Plaintiff relied on such a solicitation when investing.” However, the Ninth Circuit overturned this decision, holding that “§ 12 of the Securities Act contains no requirement that a solicitation be directed or targeted to a particular plaintiff... [and] that a person can solicit a purchase, within the meaning of the Securities Act, by promoting the sale of a security in a mass communication.” The Ninth Circuit further held that the plaintiff “need not have alleged that he specifically relied on any of the alleged misstatements.”

The Ninth Circuit opinion followed the Eleventh Circuit case, Wildes v. BitConnect International PLC. The Wildes court noted that, “when a person solicits the purchase of securities to serve their financial interests, they are liable to a buyer who purchases those securities – whether that solicitation was made to one known person or to a million unknown ones.” The Wildes court emphasized the relevance of the Securities Act, noting that “technology has opened new avenues for both investment and solicitation, sellers can now reach global audiences through podcasts, social media posts, online videos, and web links.”

Passing Title – centralized vs decentralized exchanges

A centralized cryptocurrency exchange is a digital platform where buyers and sellers can trade various cryptocurrencies, such as Bitcoin or Ethereum, using traditional order book systems. These exchanges operate as intermediaries, facilitating transactions between users by matching buy and sell orders and executing trades on behalf of participants. Centralized exchanges typically maintain control over users’ funds by holding them in centralized wallets, and users must create accounts and undergo verification processes to trade on the platform. Examples of centralized exchanges include Binance, Coinbase, and Kraken.

On April 5, 2024, the Second Circuit reversed the district court in Oberlander v. Coinbase Global Inc., holding that plaintiffs had sufficiently alleged that Coinbase was a seller under Section 12(a)(1) because some newly discovered agreements between buyers and Coinbase stated that buyers were purchasing digital assets from Coinbase, thus satisfying the passing title prong of Pinter. Without the language of the agreements expressly stating that Coinbase was a seller, the Second Circuit would likely have upheld the ruling of the district court since Coinbase was an intermediary, meaning that it provided the infrastructure to execute trades between buyer and sellers but itself did not maintain title to or sell any digital assets. It is important to note that the Second Circuit did not disturb the district court’s holding that Coinbase did not solicit the sale of securities and that its involvement was merely collateral participation, which is not sufficient to satisfy the first Pinter prong.

In contrast, a decentralized cryptocurrency exchange (“DEX”) operates on a blockchain network without the need for a central authority or intermediary. Instead of relying on a centralized entity to facilitate trades, DEXs use smart contracts to automate the trading process, allowing users to trade directly with each other in a peer-to-peer manner. Users retain control of their funds at all times. Examples of decentralized exchanges include Uniswap, PancakeSwap, and SushiSwap.

In Risley v. Universal Navigation Inc., the court ruled against the plaintiffs, stating that developers of smart contracts do not transfer title of tokens. The court likened their role to lawyers or underwriters in traditional exchanges who facilitate but are not party to transactions. The court also determined that the exchange and other defendants did not have title over each token and that any momentary transfer would be insufficient to establish liability under Section 12.

Conclusion

To date, courts have been able to apply long-standing case law to grapple with the technological intricacies of blockchain technologies and the risks of cryptocurrency. However, blockchain technology is poised to evolve at a far greater pace than court precedents could hope to keep up with. What is evident is that the interests of investors and the various blockchain projects can best be served via rule-making and robust regulatory framework, both lacking at this time.

Event-Driven Securities Litigation: an Interview with Marc I. Gross

Whether you’re an influencer, a politician, or a corporation, reputation impacts your livelihood. In the Spring 2024 issue of The Business Lawyer, Marc I. Gross published a paper rebutting Columbia Law Professors Merritt Fox and Joshua Mitts’ “Event Driven Suits and the Rethinking of Securities Litigation,” published in the Winter 2022-2023 issue of the same journal. Marc met with Brett Lazer of the Monitor to discuss why a company’s reputation is a key factor often missed by the courts when assessing the impact of misleading statements on stock prices, and the consequences thereof for measuring damages in securities fraud class actions.

The Pomerantz Monitor

Your article focuses on “event-driven securities litigation.” Perhaps you can explain what that is and the debate surrounding it.

Marc I. Gross

It’s a term Professor John Coffee of Columbia coined about 10 years ago to describe cases filed following major catastrophes, such as BP’s Deepwater Horizon oil rig explosion. The debate is whether the same rules should apply to these cases as to financial misstatement cases, because event-driven cases deal with an undisclosed, not a misstated, result. For example, in a case that Pomerantz successfully pursued against BP, the company had a series of catastrophes prior to the oil rig explosion. BP asserted it had implemented a remedial program, but failed to disclose that the program did not apply to high-risk offshore drilling. The court found that BP’s prior pattern of misconduct, combined with its failure to disclose the degree of risk investors actually faced, supported a securities fraud claim. In recent years, event-driven litigation has expanded from similar catastrophes to cases where a company was suddenly found to have engaged in other types of misconduct. Such as the dark pool trading platform at issue in Pomerantz’s case against Barclays, or the ABACUS transactions that John Paulson engaged in with Goldman Sachs, which were referenced in the film The Big Short.

In their article, Fox and Mitts argue that event-driven cases should be categorized separately and analyzed under a different set of rules, including imposition of much higher pleading burdens on plaintiffs. Frankly, I don't think they want to limit such rules to catastrophes. I think they see their proposals as a means to recast what they think is wrong in securities fraud litigation.

Monitor    

What is the argument of the Fox and Mitts’ piece?

MIG          

They say that in event-driven cases, if not most securities cases, the court should not focus on how stock prices reacted when the wrongdoing was disclosed, but on the price impact had the company said nothing at the outset. In other words, to determine damages, the court should focus on stock prices at the time the misconduct first occurred, not when the misconduct was revealed. In the Barclays case, the bank had serious prior violations related to certain trading platforms, and they said, “For our new ‘dark pool’ trading, we've now taken remedial measures to ensure customers are protected and there are no abuses,” which, in fact, they hadn’t. Fox and Mitts’ thesis is that in assessing price impact, the court shouldn't look at what happened when investors learned that Barclays’ statements were misleading, but how the market would have reacted had there been no statements about the dark pool trading at the outset, on the assumption that the company did not have to volunteer such information.

Monitor    

You say this misses a key function of these kinds of corporate utterances.

MIG          

These statements are made to burnish a company’s reputation and assure investors that past misconduct has been remediated. My argument is that courts fail to give sufficient weight to the degree to which a company's reputation impacts the stock price at the time misstatements are made. There's empirical evidence showing that a significant portion of any stock price is attributable to reputation. Marty Lipton [a founding partner of law firm Wachtell, Lipton, Rosen & Katz] suggests it’s 50%. That makes sense because companies are essentially brand names. Their value is based on what investors think their profitability will be, but also on perceptions of the management’s integrity. Investors don't like surprises, so they will invest in stocks based upon an assumption of reliability and truthfulness. We have this whole theory of fraud on the market - what else is the market doing but presuming a degree of credibility and reliability of management? Investors assume such factors are baked into the stock price. So when a company discloses misconduct, or incurs a catastrophic event, and the stock price plummets, studies have shown that the size of the decline is often disproportionate to the amount that the stock would have fallen had the company simply been truthful in the first instance. If a company says, “Instead of earning $1 we only earned $0.75,” you might expect a 25% decline based on historic price/earnings ratios. In fact, studies show that stock will actually fall over 50%. What accounts for that additional decline? As cited in my article, Professor Karpov and others have empirically shown the additional decline is attributable to the market reassessing the reputational risk of the company.

Monitor    

One of the examples you use to illustrate this effect is Wells Fargo. Can you take us through what happened in that case?

MIG          

Wells Fargo had a sterling reputation, selling at a higher price-to-earnings ratio than its competitors. The bank touted its “synergy” practices, such as getting checking account customers to invest in other types of accounts. These “synergies” helped the bank distinguish itself from its competitors. Then suddenly investors learned that Wells Fargo’s bankers were engaging in abusive practices to meet “goals”:  at the end of the quarter, transferring money from customers’ accounts into others, and then reversing the transactions. Sometimes customers lost money due to overcharge fees, sometimes they didn’t. It didn't add much to profits or revenues. This wasn’t Enron, where earnings were being faked. Wells Fargo was still making billions of dollars in profits. Indeed, when these abusive practices were disclosed, it paid only a $185 million fine, a drop in the bucket for the bank. Nonetheless, the stock price cratered by $30 billion within a month. That's an indication that the market reassessed the reliability of management. The market was prescient because it turned out that Wells Fargo was doing this with car loans, insurance and other products. Boeing currently is an extreme example of such misconduct. It didn’t cook the books like Enron, but it cratered its own planes by pushing profits before safety.

Monitor    

This gets back to the issue of a company’s statements. One supposes Boeing couldn’t come out and say it was skimping on safety to maximize profits.

MIG          

It’s a good question, because the courts have asserted, and properly so, that a company doesn't have to accuse itself of criminal misconduct. At the end of the day, it's not about merely saying that you’re taking action to improve safety as Boeing did, it’s whether you are actually doing it, which it was not. For Fox and Mitts, these situations don’t constitute securities fraud because there was no requirement to volunteer information about safety practices. Rather, the professors categorize this as only a breach of a fiduciary duty of care for which derivative claims exist as a remedy. In a sense this is correct, because directors have a fiduciary duty, under the Caremark case in Delaware, to make sure remedial measures are, in fact, being implemented. We could certainly bring a derivative case against Boeing. The problem with derivative cases is that they take money from the directors and put it back into the company without necessarily helping shareholders who lost millions when they sold shares following disclosure of the wrongdoing.

Monitor    

Fox and Mitts suggest that any function served by private securities litigation would be better addressed by derivative cases, regulatory criminal prosecutions, or SEC enforcement, but you claim these remedies are insufficient. Why?

MIG          

Historically, the SEC's recoveries are limited to collecting fines, not damages incurred by investors. In fact, studies by John Coffee and others show that private litigants recover 10 times the amount that the SEC gets in their cases. So first, it’s a matter of compensation. Second, the SEC simply doesn't have the resources to pursue all these claims. The SEC and the Supreme Court have long recognized that securities litigation firms function as private attorneys general. We play a complementary role. With better resources, could the SEC actions one day be sufficient? I’m not convinced. At a certain point it becomes political. Congress has a vested interest in this system, and so without private actors there will always be political concerns that interfere with justice being carried out.

Pomerantz Settles Ground-Breaking Case Against Perrigo for $97 Million

By the Editors

Pomerantz is always willing to pursue cases as far as the law and facts permit in order to achieve a favorable recovery for investors. In the Firm’s securities litigation against the pharmaceutical company Perrigo Co. plc (“Perrigo”), this entailed nearly seven years of litigation before three different judges, over 30 depositions, and review of over half a million documents. The result was worth the wait: in April 2024, Pomerantz’s efforts culminated in a $97 million settlement on behalf of defrauded investors. In addition, the case made ground-breaking new law that expands global investors’ rights.

Perrigo is one of the largest global manufacturers of over-the-counter healthcare products and both generic and branded drugs. The case focused on Perrigo’s botched integration of its largest acquisition ever, Omega Pharmaceuticals, and of alleged anticompetitive conduct in Perrigo’s generic drugs unit. Plaintiffs alleged that Perrigo and some senior officers and directors made misrepresentations about these topics to thwart a hostile takeover attempt in 2015 by competitor Mylan, Inc., and continued to do so for a few months after the tender offer expired in November 2015. Specifically, to discourage Perrigo investors from tendering shares, defendants allegedly concealed problems with the integration and performance of Omega, as well as a price-fixing scheme that boosted the results of Perrigo’s generic drug division. The tactic worked. Only 40% of Perrigo shareholders tendered shares, below the 50% threshold needed to consummate the merger. Approximately three months later, Perrigo began to reveal the truth about problems in Omega, ultimately taking more than $2 billion in impairment charges. Perrigo also admitted that the return of competition in topical generic drugs hurt the performance of that division. Longtime Chief Executive Officer Joe Papa left Perrigo to take a position at troubled Valeant Pharmaceuticals.

The initial complaint was filed in May 2016, just after Papa fled the company. Pomerantz’s institutional investor clients Migdal Insurance Company Ltd., Migdal Makefet Pension and Provident Fund Ltd., Clal Insurance Company Ltd., Clal Pension and Provident Ltd., Atudot Pension Fund for Employees and Independent Workers Ltd., and Meitav DS Provident Funds were appointed lead plaintiffs in August 2016.

Perrigo revealed further problems in the months that followed, and in May 2017, federal officials raided the company’s Michigan headquarters to execute a search warrant related to a generic drug price-fixing investigation. In June 2017, Pomerantz filed a robust amended complaint addressing both the initial claims and new claims based on these developments. About a year later, U.S. District Judge Madeline Cox Arleo of the District of New Jersey sustained the core claims related to misrepresentations about Omega and Perrigo’s generic drug practices. Other less significant claims were dismissed.

This case set important precedents that effectively stem the fallout for investors from the Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, Ltd. That decision appeared to close the door of U.S. federal courts to investors who purchased securities on foreign exchanges, reasoning that the Securities Exchange Act of 1934 was not intended to have extraterritorial effect. Morrison was particularly limiting for investors in cross-listed (also known as dual-listed) shares, a staple of most global portfolios. Cross-listed shares are traded both on U.S. and foreign exchanges, affording institutional investors the opportunity to execute trades on the venue offering the most favorable trading hours, pricing, and liquidity at any given moment. Under Morrison, two purchasers of the same cross-listed stock at the same time injured by the same fraudulent misrepresentations and omissions might have very different remedies, depending on the trading venue. U.S. purchasers could join together with other similarly situated investors to collectively seek compensation in a U.S. class action, while purchasers on the foreign exchange, under Morrison, were left to pursue claims individually in a foreign court.

The Perrigo action offered the perfect opportunity to test the bounds of Morrison. Perrigo was listed both on the New York Stock Exchange (“NYSE”) and the Tel Aviv Stock Exchange (“TASE”), and had elected under the Israel Securities Act to have its disclosure obligations in Israel governed by the standards of its country of primary listing – in this instance, the United States – rather than by Israeli standards. Because of that election, Israeli law applied the standards of Section 10(b) of the Securities Exchange Act of 1934 to assess claims of securities fraud. Accordingly, Pomerantz argued that in addition to a class of U.S. investors, a parallel class could be recognized addressing the claims of Israeli purchasers applying the same standards.

Pomerantz brought claims under Israeli law applying the Section 10(b) standard for TASE purchasers, as well as traditional claims under U.S. law for U.S. purchasers. In its opinion sustaining the core parts of the amended complaint over motions to dismiss, the Court held that supplemental jurisdiction was properly exercised over the TASE purchaser claims, noting that they applied the same standards as the claims asserted under U.S. law.

In its November 2019 decision, the Court positively affirmed Pomerantz’s groundbreaking strategy, certifying classes of NYSE and TASE purchasers. In doing so, the Court analyzed Pomerantz’s evidence regarding the efficiency of the TASE market, finding that the market for Perrigo securities on the TASE was sufficiently liquid and responsive to information to trigger the presumption of reliance under Basic Inc. v. Levinson. This marked the very first time since the Morrison decision that a U.S. Court has independently analyzed the market of a security traded on a non-U.S. exchange and found that it met the standards of market efficiency necessary to allow for class certification, and so set an important precedent for global investors. Following this pivotal ruling, the defendants attempted to unravel class certification by seeking interlocutory appeal, but the United States Court of Appeals for the Third Circuit rejected their petition.

Discovery was lengthy and challenging. Between the summer of 2018, when the discovery stay was lifted, and late 2020, Pomerantz obtained and reviewed millions of pages of documents, and took or participated in over thirty fact witness depositions. This discovery yielded solid evidence supporting plaintiffs’ Omega claims, and circumstantial evidence of anticompetitive practices in Perrigo’s generic drug division. The early 2018 death of a key witness who was a generic drug sales executive at Perrigo, and the United States Department of Justice’s intervention to halt depositions of witnesses it believed to be important to the government’s price fixing investigation, both played a role in constraining discovery.  

In June 2021, just as the parties were finishing briefing defendants’ motions for summary judgment, the case was reassigned to U.S. District Judge Julien X. Neals. Judge Neals held oral argument in April 2022, which lasted for more than seven hours. However, in the fifteen months that followed, he did not issue a decision. In July 2023, Chief District Court Judge Renée Marie Bumb reassigned the case (and the long-languishing motions for summary judgment) to herself. A month later, she issued a split decision, sustaining most of the Omega claims against Perrigo and Joseph Papa, ordering further briefing and argument on the generic drug-related claims against Perrigo, and granting summary judgment dismissing other claims. Chief Judge Bumb then ordered the parties to mediate. In April 2024, after several mediation sessions, the parties agreed to resolve all claims for a cash payment of $97 million.

“We are proud to have achieved this above-average recovery despite the considerable defenses raised in this action,” Partner Joshua Silverman, who ran the action for Pomerantz along with Managing Partner Jeremy Lieberman, said. “In addition to the headline number, we were pleased to create new law that will benefit global investors in the years to come.” 

Delaware Proposes Dramatic Corporate Law Amendments in Response to Moelis Decision

In response to a recent landmark decision by the Delaware Court of Chancery, Delaware’s legislature may be poised to pass sweeping amendments to Delaware’s General Corporation Law (the “DGCL”). These amendments could potentially hand over power from a board to a corporation’s largest shareholders, which would affect the rights of all the corporation’s investors.

The DGCL governs the fiduciary duties of the officers and directors of most publicly traded companies in the United States. As such, the Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for the determination of disputes involving the DGCL, including stockholder class and derivative lawsuits alleging breaches of fiduciary duty.

These proposed amendments to the DGCL, released on March 28, 2024 by the Council of the Corporation Law Section of the Delaware State Bar Association, are expected to be introduced to the Delaware General Assembly for approval this year.

They are an attempt to legislatively overrule the Delaware Court of Chancery’s February 23, 2024 decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., which primarily concerned DGCL Section 141(a). That provision states that “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” Among other things, Section 141(a) polices external agreements entered into by a board of directors, prohibiting a board from contracting away its duties in private agreements with third parties.

The Moelis case concerns just such agreements. The day before shares of Moelis & Company (Moelis & Co.”), a global investment bank, began publicly trading following its IPO, the company’s board of directors (“Board”) entered into agreements directly with the company’s Chairman, Chief Executive Officer and Founder Ken Moelis, requiring Mr. Moelis’ prior written consent before the Board could take 18 categories of actions (the “Pre-Approval Requirements”). The Court of Chancery characterized the Pre-Approval Requirements as broad and encompassing “virtually everything the Board can do.” In addition to the Pre-Approval Requirements, the Board also entered into a number of other agreements with Mr. Moelis, giving him the right to, among other things, nominate a set number of Board members. Mr. Moelis was also given the right to include at least one of his nominees on all Board committees, effectively ensuring that no Board committees would be entirely independent from Mr. Moelis unless he waived his right to include his Board nominee on the committee.

A company stockholder filed suit in the Delaware Court of Chancery, alleging that the various agreements entered into between Mr. Moelis and the Board violated, among other things, Section 141(a). Ultimately, the Moelis court found that the Pre-Approval Requirements “mean that [Mr.] Moelis determines what action the Board can take. The directors cannot exercise their own judgment. They must check with Moelis first and can only proceed with his approval.”  Accordingly, the Board required pre-approval from Mr. Moelis before taking virtually any meaningful action, effectively giving Mr. Moelis control over the Board. The court found that, with the Pre-Approval Requirements in place, the Board was not really a Board. The directors only manage the company to the extent Moelis gives them permission to do so.

The court was unpersuaded by the Board’s defense that the agreements with Mr. Moelis represented a private contract between the Board and a stockholder. The court drew distinctions between contracts that companies necessarily enter into in the ordinary course of business, and the governance-related agreements entered into by the Moelis & Co. Board. The court also noted that the agreements with Mr. Moelis were entered into directly with the Board, as opposed to typical agreements entered into with a corporation.

In addition to striking down the Pre-Approval Requirements, the court also found that the agreements requiring a nominee of Mr. Moelis to appear on Board committee was unenforceable and violated Section 141. The court found that determining the composition of board committees falls within the Board’s authority. A stockholder cannot determine who comprises a committee.

Not all of the agreements with Mr. Moelis were found to violate Delaware law. The court found that it was permissible for the Board to allow Mr. Moelis to nominate designees for the Board. However, the court conditioned this right by noting that “what the Board or the Company does with those candidates is what matters.”  Mr. Moelis could nominate his designees at a stockholder meeting, and the company can agree to facilitate that process, so long as the Board is not compelled to recommend Mr. Moelis’ designees for election.

The court also struck down other agreements regarding the size and composition of the Board. By way of example, the court found that the Board could not enter into an agreement with Mr. Moelis to fill a vacancy created by a departing Mr. Moelis designee with another Mr. Moelis designee. The court also found that it was improper for the Board to agree that it would not increase the number of Board seats beyond eleven, an agreement meant to prevent the Board from diluting the control of Mr. Moelis’ nominees to the Board.

The court made it clear that alternative avenues exist for the Moelis & Co, Board and other boards seeking to enter into similar agreements with significant stockholders, noting that many of the invalidated agreements would have been valid if they were found in the Certificate of Incorporation as opposed to private agreements. The court also noted that revising a Certificate of Incorporation need not be an onerous process. The Moelis & Co. Board could, in theory, use its blank check authority to issue Mr. Moelis “a single golden share” and grant that preferred stock a set of voting rights and director appointment rights. The certificate of designations for the new preferred stock would become part of the Certificate of Incorporation as a matter of law, resolving many of the court’s concerns regarding the agreements. The court acknowledged that some might find it “bizarre” that the DGCL would prohibit one means of accomplishing a goal while allowing another.

The court also appeared to anticipate the potential for its decision to create upheaval, acknowledging that many other Delaware corporations had entered into agreements that were similar to the agreements that it struck down in the Moelis opinion. The court acknowledged that “[c]orporate planners now regularly implement internal governance arrangements through stockholder agreements,” and that such agreements “contain extensive veto rights and other restrictions on corporate action.”  However, the court was constrained by the mandates of Section 141(a), noting that “a court must uphold the law, so the statute prevails [over the private agreements].”

The uncertainty created by Moelis boiled over on May 24, 2024, when proposed amendments to Delaware’s corporate code were introduced that threaten to upend Section 141(a) and alter the relationship between stockholders and Delaware corporations. The proposed amendments, which were assigned to the Delaware Senate Judiciary Committee, would effectively reverse the Moelis decision by giving Delaware boards greater ability to enter into similar agreement to those that were struck down in Moelis. The proposed amendments would permit a board to enter into agreements with current or prospective stockholders similar to those that were rejected in Moelis, provided that the amendments do not otherwise violate Delaware law. Specifically, the amendments state that the corporation may agree in a contract with a stockholder to: (a) restrict or prohibit itself from taking actions specified in the contract, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). Unless amended, the proposed amendments will allow Delaware corporations to more easily contract away traditional corporate powers to large stockholders.

By Samuel J. Adams

DOJ Rolls Out Pilot Program for Voluntary Disclosures

By James M. LoPiano

On April 15, 2024, the U.S. Department of Justice’s (DOJ) Criminal Division unveiled its Pilot Program on Voluntary Self-Disclosures for Individuals. Under this Pilot Program, the Criminal Division may offer non-prosecution agreements (NPAs) to individuals who voluntarily disclose original information about certain types of criminal conduct to the DOJ. In addition to providing a clear framework that encourages employees to speak up about wrongdoing and incentivizes companies to shore up their compliance protocols, the program may have a positive impact on securities litigation.

The Pilot Program is meant to aid the DOJ in its fight against corporate malfeasance by incentivizing financial institutions and corporations to enhance their compliance efforts, while simultaneously increasing pressure on their employees to self-disclose certain forms of misconduct.

To be eligible for an NPA under the Pilot Program:

1.       The disclosure must be made to the DOJ’s Criminal Division;

2.       The reporting individual must disclose original information about certain types of misconduct;

3.       The disclosure must be voluntary;

4.       The disclosure must be truthful and complete;

5.       The reporting individual must agree to fully cooperate with and be willing and able to provide substantial assistance to the DOJ;

6.       The reporting individual must agree to forfeit or disgorge any profit from the criminal wrongdoing and pay restitution or victim compensation; and

7.       The reporting individual must not meet certain disqualifying criteria.

What is “original” information?

Original information is non-public information that was not previously known to the Criminal Division or to any other component of the DOJ. Accordingly, the Pilot Program is focused on uncovering new criminal activity, rather than supplementing ongoing investigations with new information. Because the information must be original, only the first person to bring the wrongdoing to the DOJ’s attention will be eligible for the NPA, and only while the wrongdoing remains unknown to the public.

What types of criminal activity must the information relate to?

Essentially, the disclosed information must relate to white-collar crimes, such as schemes involving money-laundering, fraud, bribery, corruption, or kickbacks. The crimes must be committed by organizations (or their insiders or agents) whose conduct is important to maintaining the integrity of the financial and securities markets, such as banks, large public or private companies, or investment funds and advisors.

What is a “voluntary” disclosure?

A voluntary disclosure is made without any prompting by the DOJ or other federal law enforcement or regulatory bodies, without the risk of imminent disclosure to the public or government, and in the absence of an ongoing investigation. As such, the voluntary disclosure requirement supports the Pilot Program’s goal of seeking out only previously unknown information, with the aim of rooting out wrongdoing that would not otherwise have come to the DOJ’s attention.

What is a “truthful and complete” disclosure?

A truthful and complete disclosure includes all known information related to the misconduct, including the full extent of one’s own involvement in the wrongdoing and any other matters about which the DOJ may inquire. In practical terms, once you report information to the DOJ, you must disclose everything you know about the wrongdoing in question; partial tips go unrewarded.

What does it mean to “fully cooperate” with and provide “substantial assistance” to the DOJ?

Fundamentally, a reporting individual must be willing to become an evidence-producing vehicle for the DOJ. The reporting individual must be willing to help the DOJ gather evidence (potenitally even wearing a wire to work), provide truthful and complete testimony during interviews or in court, and produce documents, records, and other evidence.

Who is disqualified from the Pilot Program?

Individuals occupying certain roles or who have committed certain crimes are disqualified from participating in the Pilot Program. Some of these individuals are obvious, such as a scheme’s organizer or leader. Others appear to be disqualified to achieve a purpose-driven result. For example, elected or appointed foreign government officials, as well as domestic government officials at any level, are ineligible for an NPA. In this way, the Pilot Program excludes individuals who are often targeted by corporate wrongdoers to facilitate white-collar crimes: a city official overseeing the bidding process for a lucrative government contract; a regulator responsible for green-lighting a new facility or product; or an administrative functionary issuing business permits to foreign companies. By preventing these individuals from availing themselves of the Pilot Program, the DOJ deters them from engaging in the crimes that the Pilot Program is focused on, such as fraud, bribery, and corruption.

Other examples of individuals disqualified from the Pilot Program include an offending  corporation’s Chief Executive Officer or Chief Financial Officer (or those occupying an equivalent role); anyone with a previous felony conviction or a conviction of any kind for conduct involving fraud or dishonesty; and anyone with a criminal history involving violence, use of force, threats, substantial patient harm, any sex offense involving fraud, force, or coercion, or relating to a minor, or any offense involving terrorism.

How might the Pilot Program help uncover corporate wrongdoing?

The Pilot Program facilitates and rewards prompt and proactive disclosures by those aware of or involved in corporate wrongdoing. As discussed above, those who wait until an investigation begins or who come forward after someone else has done so, will not be eligible for an NPA under the Pilot Program. The Pilot Program’s original information requirement has essentially created a race-to-the-DOJ: once any facet of the DOJ becomes aware of the wrongdoing, whether from the corporation itself, one of its many employees, or an outside source such as a news organization, one cannot satisfy the Pilot Program’s criterion for originality. Similarly, because of the Pilot Program’s voluntary disclosure requirement, once an internal company investigation begins, it is likely too late to seek an NPA under the Pilot Program. This means that anyone involved in or otherwise aware of the wrongdoing is incentivized to report to the DOJ first to secure an NPA to the exclusion of everyone else.

For the same reason, corporations are more incentivized in the first instance to shore up their compliance efforts. Because the Pilot Program encourages employees to report suspected corporate wrongdoing to the DOJ before, for example, a company’s own HR department or compliance hotline—which might kick off an internal investigation by the company and disqualify employees from the Pilot Program—the company and its management will presumably put more effort into preventing or detecting wrongdoing, as opposed to merely relying on internal reporting structures.

What does the Pilot Program mean for securities litigation?

If the Pilot Program is successful, then the DOJ will presumably announce more investigations into and/or file more complaints against offending corporations. If this causes a company’s stock price to fall, a securities fraud class action becomes a potentially viable route for redress for harmed investors.

Some of the Pilot Program’s requirements lend themselves well to securities litigation. For example, securities fraud class actions often hinge on showing that an event, usually a disclosure of some kind, prompted a company’s share price to fall, and that this share price decline was the result of the market digesting new information about the company and baking that information into the company’s share price. Accordingly, if a securities fraud class action follows from a DOJ investigation, which itself follows from a disclosure under the Pilot Program, the Pilot Program’s original information requirement can help litigators verify that a disclosure or event revealed new information to the market. Further, a reporting individual’s testimony under the Pilot Program may aid lawyers in their discovery (i.e., evidence-gathering) efforts by, for example, helping them narrow down which department or individuals of an organization were most likely involved in or aware of the wrongdoing in question, while simultaneously helping them avoid deposing those departments or individuals unlikely to be implicated in or exposed to the wrongdoing.

In sum, the Pilot Program is a promising new tool for the DOJ to employ in its fight against corporate and financial malfeasance. It also presents a greater opportunity for both the public and private sectors to investigate corporate bad actors and hold them accountable.