Q&A with Jennifer Banner Sobers

AN INTERVIEW WITH ATTORNEY: JENNIFER BANNER SOBERS | POMERANTZ MONITOR | JULY/AUGUST 2020

Pomerantz attorney Jennifer Banner Sobers has already achieved a level of success that transcends her youth, having scored a $15 million settlement for the class in In re Ubiquiti Networks, Inc. Sec. Litig. earlier this year and earning recognition as a 2020 Rising Star from both Law360 and the New York Law Journal.

What path brought you to the practice of securities litigation?

JBS: I knew that I wanted to be a lawyer from a young age. After learning about Thurgood Marshall and the work of the NAACP in successfully litigating discrimination lawsuits, which was instrumental in securing justice and equal rights for African Americans, it was clear to me that law was an important and powerful profession. I wanted to play a part in securing justice for those who have been wronged. After graduating from the University of Virginia law school, I worked at a top law firm on a variety of litigation matters including securities litigation, which I found fascinating. It is rewarding to work to protect investors’ rights – many of whom are underrepresented. It is particularly challenging and rewarding to litigate securities cases at Pomerantz, where we often argue novel ideas and make critical case law.

You were an integral member of the litigation team that in 2018 achieved the historic $3 billion settlement in Petrobras. Can you speak to that experience?

JBS: I am proud to have been part of the Petrobras case, a securities class action that arose from a multi-billion-dollar kickback and bribery scheme involving Brazil’s largest oil company. This was a highly watched case, reported in the news domestically and internationally, with breaking developments arising almost daily as the truth emerged. The sheer magnitude of the case was remarkable – at one point there were at least 175 attorneys reviewing documents and providing support to the litigation team. The depth of discovery was of critical importance, and its thoroughness was a key contributing factor in reaching the excellent settlement achieved for the plaintiffs and the class. As the manager of all third-party discovery in the U.S., it was both a challenge and a thrill to research, subpoena and depose relevant entities, and to brief oppositions to motions to quash those subpoenas. And this was while overseeing the review of millions of documents, the vast majority of which were in Portuguese, and thousands more which were in Japanese. Petrobras truly was a historic case that gave the Pomerantz litigators the chance not only to prove their mastery of the law, but also to demonstrate their ability to manage litigation on a massive scale.

In 2019 you were awarded membership in the National Black Lawyers Top 100. What does that recognition mean to you? JBS: The NBL hand-selects influential lawyers who have a reputation for providing excellent legal representation and are leaders in their respective practice areas. It was an honor to have been awarded membership because I have always taken the charge to be a zealous advocate to heart. As an African American female litigating plaintiff-side securities cases, I have personally crossed paths with at most a handful of African American junior and mid-level attorneys in my field and perhaps two others at the senior/partnership level. I hope that my successes so far serve to show other minorities that they, too, can succeed. Moreover, I am proud to share membership in the NBL with so many brilliant and successful African American attorneys, including Ted Wells, Jr. and Tracey Brown, who have blazed the trail for attorneys like me.

Why is mentoring and supporting other women and minorities within and beyond the legal community important to you and how do you do so?

JBS: I would not be where I am today without the support of so many people who took the time and effort to help me cultivate my talents and reach my potential – from my elementary school principal who gave my mother the name of a supplemental weekend and summer school program that I attended in Harlem, to the director of that program who encouraged me to pursue placement at a private junior high school that stressed the values of academic excellence, to the selection committee of the Ron Brown Scholar Program, which not only provided me with much needed scholarship money but which continues to provide support and encouragement today. By the grace of God, my parents, and my substantial network of supporters over the years, I am a success story. Consequently, it is my responsibility to pay it forward. I love speaking with African American youth, either as the guest speaker at schools and churches or even just informally one-on-one, about the trajectory of my life, from growing up in the projects of Harlem to attending Harvard University and University of Virginia School of Law, to practicing at highly respected firms. I am also proud to have been a founder of the Let’s Get Ready College Access program, which provides SAT preparation to high school students, guidance about college admissions and the financial aid process, and mentorship throughout college. Let’s Get Ready has served more than 30,000 high school students from low-income circumstances.

What are the issues facing securities litigation plaintiffs today?

JBS: What is so fascinating about securities litigation, and, in particular, the kinds of cases Pomerantz pursues, is that it involves events that we see breaking in the news every day. Securities litigation is responsive to what is going on in the world, reacting to issues that affect us all, and, in many situations, requiring novel arguments that serve toward making precedents. For example, we recently filed cases against cruise lines and pharmaceutical companies related to alleged misbehavior arising from the COVID-19 pandemic. And we’re involved in cases involving the #MeToo movement, including arguing that allegations involving a company’s Code of Conduct or Ethics, once considered mere puffery, are material and should be actionable. As society changes and evolves, the plaintiffs’ bar of securities lawyers will be there to hold companies accountable and ensure that investors’ interests are protected.

This year alone, you have been honored with two Rising Star awards. What are you most proud of accomplishing in your young career?

JBS: I have put in a great deal of hard work - balancing time spent with my beautiful family as a mother, wife, and daughter with time spent providing the best legal work possible that our clients and investors deserve. I am proud that I have been blessed with the strength and fortitude to “do it all.” Pomerantz has provided me with opportunities to hone my skills as a strong advocate, and I look forward to growing my practice with some of the most innovative and brilliant attorneys I have ever met. While I believe the events of the last months involving the police killings of African Americans involve complicated matters that cannot be resolved overnight, I believe that each time someone like me from humble beginnings who has been blessed by the grace of God with success through hard work and sacrifice goes into a courtroom to deliver a successful argument, the more it becomes ingrained that African Americans have and continue to play an integral role in society. I am proud of my role in bringing about important societal change. 

Fiduciary Responsibility During COVID-19

ATTORNEY: THOMAS PRZYBYLOWSKI | POMERANTZ MONITOR | JULY/AUGUST 2020

The COVID-19 pandemic has significantly disrupted the financial and operational health of businesses across a variety of industries, with companies facing tremendous uncertainty in both their short-term and long-term planning. With companies left more vulnerable to both external and internal attacks, the fiduciary responsibility of their officers, directors, and all other executives to the companies and their shareholders is more important than ever.

On March 23, 2020, the Delaware Chancery Court released a transcript ruling in K-Bar Holdings LLC v. Tile Shop Holdings, Inc. that demonstrates that, even in times of great uncertainty, fiduciary duties may not be relaxed. Specifically, the Court found a colorable claim that the board of a publicly traded company breached its fiduciary duties by allowing a stockholder group, three of whom were board members, to take advantage of the company’s trading price to increase the group’s ownership percentage.

The conduct at issue in the case, which was brought by an unaffiliated stockholder, dates back to October of 2019, when the Tile Shop board of directors announced that the company would go dark, delist from the Nasdaq, and deregister from the SEC. While providing a brief background to the Court, plaintiff’s counsel explained the significant impact of the company’s announcement, stating that:

“[i]mmediately after the announcement, the market price of the company’s stock dropped about 60 percent and the board members began to purchase, and continue to purchase, the company’s stock at a frenzied pace at depressed prices.

Since October 22nd to today, Your Honor, defendants Kamin and Jacullo have bought over 13 percent of the company and now defendants Rucker, Kamin, and Jacullo own about 42 percent of the company.

One member of the board, Christopher Cook, immediately resigned from the board after the board approved the going dark. And the rest have done nothing since the approval to protect the company from the three insiders taking control.

Moreover, plaintiff’s counsel explained that “since the going dark and the defendants buying up the shares, there’s been no attempts to reach a standstill, from our understanding. There’s been no poison pill put in place. Rather, they’ve been rushing to complete the going dark scheme.”

The two primary fiduciary duties of officers and directors are that of (1) care, which requires them to make informed decisions in good faith and in the best interests of the company, and (2) loyalty, which requires them not to engage in self-dealing and to put the interests of the company ahead of their own. To determine whether officers and directors have performed in accordance with these duties, courts assess their conduct in the context of the business judgment rule, which is a rebuttable presumption that the officer or director acted in good faith and in the corporation’s best interest. When applied, this presumption protects internal business decisions from external criticism.

The fiduciary duties of officers and directors persist regardless of whether the company is solvent, insolvent, or in the “zone of insolvency” (in which a company is only approaching insolvency). Indeed, while solvency dictates who may bring a claim against the company and whether such a claim may be direct or derivative, officers and directors owe the duties of care and loyalty to the company and shareholders until those duties are officially discharged. Finally, although recent Delaware case law has suggested that creditors can no longer bring derivative claims based on actions taken while a company was in the zone of insolvency, it is still difficult to determine exactly when a company has actually reached insolvency. Accordingly, creditors may still challenge decisions even when made in the zone of insolvency.

In the Tile Shop case, the Court ultimately directed the stockholder group to cease purchasing shares of the company, explaining that the threat of irreparable harm to the corporation and its shareholders was too great to allow any further purchases. In reaching this ruling, the Court stated multiple times that it believed there to be a colorable claim before it. Furthermore, the Court noted that, although a colorable claim simply means a claim that is nonfrivolous, “at the very least, the timing of the events is such that it would raise – well, my equitable antenna is set aquiver. When I look at the time frame, which doesn’t prove anything, it just tells me, as I have already expressed, that there is a colorable claim here that mischief is afoot.”

The ruling in Tile Shop provides good insight into the attitude courts have towards fiduciary duties. Indeed, the Court found that the board’s simple inaction in allowing such an aggressive series of share purchases allowed for a colorable claim. Applying this ruling to the Covid-19 pandemic, Tile Shop should act as a reminder to officers and directors that they must be extra vigilant when a company is experiencing enhanced volatility. Accordingly, officers and directors should take measures to ensure that any decisions made are in compliance with their fiduciary obligations, such as:

  • maintaining oversight of the company’s results of operations and forward-looking strategy;

  • increasing upward reporting from management; organizing more frequent board or committee meetings and keeping detailed and timely minutes;

  • coordinating a task force specifically designed to address Covid-19 concerns;

  • retaining experts to provide advice on matters such as operational viability, legal compliance, and governmental/ regulatory updates; and

  • monitoring the availability of transactions that could potentially enhance stockholder value.

Certainly, this list is not exhaustive. As Tile Shop demonstrated, courts conduct a factual analysis to determine whether, in the particular circumstances facing the company, officers and directors conducted themselves appropriately.

As such, what is most important is that that boards take actions that comply with their basic fiduciary obligations, fall within the business judgment rule, and protect the interests of the stockholders. Officers and directors should consult with their own counsel to determine the specific needs and interests of the company. Moreover, officers and directors must be mindful of the company’s solvency, in order to assess the company’s vulnerability to potential shareholder or creditor litigation. Boards must remember that market volatility and uncertainty can make companies especially vulnerable to attack. Ultimately, regardless of how these duties materialize, officers and directors must remember that their primary goal is to protect the shareholders. Finally, it is important to note that, although this article has primarily addressed the considerations of companies incorporated in Delaware, the utility of these suggestions can extend to LLCs, partnerships, or any other company facing the uncertainties of the COVID-19 pandemic.

Second Circuit Upholds Class Certification Order in Goldman Sachs

ATTORNEY: OMAR JAFRI | POMERANTZ MONITOR | JULY/AUGUST 2020

On April 7, 2020, the United States Court of Appeals for the Second Circuit affirmed the district court’s order to certify a class under Rule 23(b)(3) of the Federal Rules of Civil Procedure in In re Goldman Sachs Grp. Inc. Sec. Litig. This case arose out of four collateralized debt obligation (“CDO”) transactions that were marketed by Goldman as ordinary asset-backed securities. Behind the scenes, however, Goldman allowed the hedge fund, Paulson & Co. (“Paulson”), to select risky mortgages that it knew would perform poorly or would otherwise fail. Goldman ultimately admitted that it failed to disclose Paulson’s role in the CDOs, and paid a $550 million fine in connection with a settlement with the SEC.

Shareholders of Goldman alleged that it made false and misleading statements regarding (1) the procedures and controls utilized to identify or avoid conflicts of interest; (2) the effort made to comply with all applicable laws, rules and ethical principles; and (3) the alleged dedication to integrity and honesty in dealing with clients. In other words, the plaintiffs alleged that Goldman falsely represented that it was aligned with the interests of investors when, together with Paulson, it was profiting from short positions that conflicted with the interests of those very investors.

Numerous amicus briefs, including from parties routinely hostile to investors’ rights such as the U.S Chamber of Commerce and the Securities Industry and Financial Markets Association, urged the Second Circuit to let Goldman off the hook based on the assumption that the district court held Goldman to an “impossible standard,” and that allowing its decision to stand would open the floodgates for “abusive” securities lawsuits.

In upholding the district court’s order to certify the class under Rule 23(b)(3) of the Federal Rules of Civil Procedure, the Second Circuit rejected Goldman’s attempt to limit the scope of the inflation-maintenance theory in securities fraud actions. Under the inflation-maintenance theory, otherwise known as the price impact theory, material misrepresentations are presumed to artificially maintain an already inflated price of stock. Goldman requested the Second Circuit to limit the inflation-maintenance theory to either “fraud-induced” appreciation of the stock price or “unduly optimistic” misrepresentations about “specific, material financial or operational information” or those that “falsely convey that the company has met market expectations about a specific, material financial metric, product, or event.”

The full panel declined to narrow the scope of the inflation maintenance theory on these grounds. The majority relied on the Second Circuit’s decision in In re Vivendi, S.A. Sec. Litig. to observe that “[a]rtificial inflation is not necessarily fraud-induced, for a falsehood can exist in the market (and thereby cause artificial inflation) for reasons unrelated to fraudulent conduct.” The dissent agreed that Vivendi was the law of the Circuit, and that “the district court did not misapply the inflation-maintenance theory of price impact.” The majority further rejected Goldman’s attempt to limit the inflation maintenance theory to a specific set of narrow circumstances such as misrepresentations about financial or operational information or specific metrics, products or events. Observing that none of the authorities that Goldman relied on supported such a limited application of the inflation-maintenance theory, the majority also rejected Goldman’s argument that general statements cannot artificially maintain the price of a company’s shares.

The majority construed Goldman’s attempt to carve out “general statements” from the inflation-maintenance theory as a means to “smuggle” materiality into a certification inquiry even though long-standing precedent holds that materiality is not an appropriate consideration at the class certification stage and Goldman had, in fact, failed to convince the district court that the general statements at issue were immaterial as a matter of law at the pleading stage. Accordingly, the Second Circuit held that it is proper to infer that the company’s stock price was inflated by the amount of the reduction in price following a disclosure of the falsity of the statements. That is all the law requires to demonstrate price impact in the Second Circuit.

The majority also affirmed the district court’s ruling that Goldman had failed to rebut the Basic presumption. In a securities fraud action, a plaintiff is entitled to the Basic presumption if the defendants’ misstatements are publicly known, the shares trade in an efficient market, and the plaintiff purchases the shares after the misrepresentations are made but before the truth is revealed. Once a plaintiff properly invokes the Basic presumption, defendants face a “heavy burden” to show, by a preponderance of the evidence, that the decline in stock price was entirely due to factors other than the alleged misrepresentations. Goldman sought to rebut the Basic presumption by alleging that dozens of news articles published before the corrective disclosures revealed facts about its conflicts of interest but were not accompanied by a corresponding decline in its stock price. Goldman also presented expert testimony that the decline in its stock price was not due to the alleged misrepresentations, but was caused by the revelation of an SEC enforcement action, including a possible fine.

The majority affirmed the district court’s conclusion that the absence of price movement following the release of the news articles was not sufficient to break the link between the alleged corrective disclosures and the subsequent price decline. This was so because the purported corrective disclosures, including the SEC’s complaint against Goldman, contained newly revealed “hard evidence” in the form of damning emails and internal memoranda regarding Goldman’s pervasive conflicts of interest, which was not revealed in the earlier news reports. The majority thus found no “clear error” in the district court’s decision to weigh the evidence, upheld its conclusion that Goldman failed to rebut the Basic presumption, and affirmed the order to certify the class.

The majority’s decision is consistent with the Second Circuit’s decision in Waggoner v. Barclays PLC—a case where Pomerantz prevailed in convincing the Second Circuit to affirm the district court’s decision to certify the class. In Barclays, the Second Circuit had similarly emphasized that defendants must present “direct, more salient evidence” to rebut the Basic presumption, and rejected the defendants’ attempt to overcome the presumption via a more lenient standard.

One member of the panel dissented. While the dissent agreed with the basic contours of the price inflation theory, it disagreed with the majority’s decision to uphold the certification order. According to the dissent, Goldman rebutted the Basic presumption based on “persuasive and uncontradicted evidence” that Goldman’s share price did not decline after dozens of news reports allegedly revealed the nature of its conflicts of interest. The dissent further found that plaintiffs failed to refute Goldman’s expert’s conclusion that the decline in stock price was caused by the announcement of the SEC and DOJ enforcement actions rather than factual allegations contained in the complaint. However, the dissent did not explain why newly revealed “hard evidence,” in the form of damning emails and internal memoranda regarding Goldman’s pervasive conflicts of interest that was not revealed in the earlier news reports, was immaterial. The dissent would also have given courts the license to assess materiality at the class certification stage even though prior precedent holds that materiality is irrelevant at the class certification stage and defendants face an uphill battle to challenge materiality even at summary judgment.

In late June 2020, Goldman asked the Second Circuit to stay its mandate while it petitioned the Supreme Court to hear its appeal. 

Pomerantz Achieves Victory for Investors in Acadia Class Action

ATTORNEY: TAMAR A. WEINRIB | POMERANTZ MONITOR | JULY/AUGUST 2020

In an exciting victory for aggrieved Acadia investors, Judge Anthony J. Battaglia of the United States District Court for the Southern District of California issued an order on June 1, 2020 in In re Acadia Pharmaceuticals Inc. Securities Litigation granting in part and denying in part defendants’ motion to dismiss. The decision marks a significant achievement for investors seeking to recover losses due to defendants’ alleged fraud.

Acadia is an American biopharmaceutical company. In April 2016, its sole drug, NUPLAZID, received approval from the U.S. Food and Drug Administration (the “FDA”) to treat hallucinations and delusions associated with Parkinson’s disease-related psychosis (“PDP”). Plaintiff’s complaint alleges that defendants issued misleading public statements regarding NUPLAZID and commercialization strategies for the drug, while failing to disclose that they paid lucrative kickbacks to doctors to incentivize them to prescribe NUPLAZID despite its disturbing safety profile.

Indeed, prior to NUPLAZID’s FDA approval, the drug failed three of four clinical trials. Nevertheless, despite a scathing review of its safety by the FDA’s lead reviewer, who recommended against approval, NUPLAZID did receive approval because—with only off-label alternatives available—the FDA concluded that it addressed “an unmet medical need.”

Following its commercialization, and unbeknownst to investors, the adverse event reports started pouring in. Corrective disclosures regarding the mounting adverse events, the FDA’s decision to reevaluate the drug, and the company’s improper payments to doctors led to several significant drops in Acadia’s stock price.

In late February 2018, after Acadia announced disappointing sales results for NUPLAZID, and again in early April 2018, after CNN reported on safety concerns over the drug, Acadia’s stock price experienced single-day declines of 20% and 23.4% respectively. The CNN report stated that “[p]hysicians, medical researchers, and other experts told CNN that they worried that [NUPLAZID] had been approved too quickly, based on too little evidence that it was safe or effective. And given these mounting reports of deaths, they say that more needs to be done to assess NUPLAZID’s true risks.”

Shortly afterwards, in late April 2018, CNN reported that the FDA had decided to re-examine NUPLAZID’s safety, leading Acadia’s stock price to fall another 21.9%.

Then, on July 9, 2018, the Southern Investigative Reporting Foundation published a report entitled “Acadia Pharmaceuticals: This Is Not a Pharmaceuticals Company.” The report stated that “evidence is mounting that something is horribly wrong with Acadia’s sole drug, NUPLAZID, an antipsychotic for Parkinson’s disease patients who experience episodic hallucinations and delusions” and that “Acadia has accomplished its growth in ways that have attracted intense regulatory scrutiny for other drug companies” including “dispensing wads of cash to doctors to incentivize prescription writing and downplaying mounting reports of patient deaths.” On this news, Acadia’s stock price fell another 6.8% on unusually heavy trading volume.

In denying defendants’ motion to dismiss, the Court held that their statements representing NUPLAZID as safe, detailing specific steps of Acadia’s commercialization efforts, and touting patient satisfaction as well as rising prescription rates, all failed to disclose that (i) mounting reports of adverse events and deaths related to NUPLAZID post-commercialization raised the risk that the FDA would reconsider the drug’s safety; (ii) as a result of NUPLAZID’s deleterious safety profile and the availability of off-label alternatives, Acadia embarked on a campaign to pay off physicians to prescribe NUPLAZID; and (iii) these improper business practices raised a risk that Acadia would face regulatory scrutiny for potential violations of the Anti-Kickback Statute and Federal False Claims Act.

In so ruling, the Court rejected Acadia’s truth-on-the-market defense because the supposedly public information had not been disclosed with sufficient intensity and also because that defense is inappropriate at this stage of litigation. The Court dismissed statements of literal truth (e.g., statements discussing net sales), statements deemed forward-looking (e.g., “we expect that usage should increase and that the number of patients on drug will likely build over time”), opinion statements (e.g., we are confident NUPLAZID over time should become the standard of care for patients with hallucinations and delusions associated with PDP”), and statements that the Court deemed corporate optimism (e.g., “as was the case with the field management group we hired in March 2015, this is truly an impressive group”).

Indicative of the strength of the plaintiff’s argument, the Court also found loss causation as to all the alleged stock drops and found scienter based on allegations that defendants had a legal obligation to track and report payments to physicians to the government, had access to the adverse event reports, focused heavily on NUPLAZID as the company’s only drug, and that three members of Acadia’s board resigned four days after NUPLAZID received FDA approval but prior to commercialization.

With this victory, the class action to recover losses suffered by Acadia investors due to the defendants’ alleged fraud will continue to move forward.

Tamar Weinrib is Lead Counsel for the Class in In re Acadia Pharmaceuticals, Inc. Securities Litigation 

Letter to the Editor: A Tribute to H. Adam Prussin

A TRIBUTE TO H. ADAM PRUSSIN | POMERANTZ MONITOR | MARCH/APRIL 2020

In February 2004: George W. Bush is President. Howard  Dean, John Kerry, and Joe Lieberman are frontrunners in the Democratic primaries. A study reports that the 1918 flu virus that killed 20 million people may have had a unique bird-like protein and other similarities to the 2004 outbreak of bird flu in east Asia. The SEC adopts enhanced rules for mutual fund expenses and portfolio disclosures, part of the fall-out from the mutual fund late-trading scandal of 2003. Pomerantz drops the inaugural issue of The Pomerantz Monitor, with Partner H. Adam Prussin at the helm.

For over sixteen years, Adam’s Monitor has covered developments in securities litigation, corporate governance, and government policy, giving readers the backstory for and insight into complex and essential matters. In its first issue, the Monitor reported on California’s State Treasurer’s proposal that California’s two largest pension funds, CALPERS and CALSTRS, target $1 billion of their investment assets into “environmentally screened” funds, and another $500 million into corporations that nurture “clean” technologies. The Treasurer’s justification was that companies that are not focused on reducing pollution face the risk of huge clean up costs in the future. Opined Adam, “This strategy is viewed as an effort to exert market pressure to address global warming and other environmental concerns that have not been at the top of this administration’s regulatory agenda.” Our readers gained insight into the nexus of environmental stewardship and the market more than a year before the term “ESG investing” was coined.

Among other relevant matters, the inaugural issue provided insight into a controversial pension reform bill passed by the Senate in January 2004 allowing companies to reduce their contributions to employee pension plans by about $80 billion over the next two years. The bill was a response to concerns that, because of a three year long bear market, required funding obligations had sky-rocketed and companies were having difficulty keeping up.

As a seasoned, expert securities fraud litigator with hardwon successes under his belt, Adam approached each issue by suggesting salient topics for Pomerantz attorneys to cover. His editing process entailed an intentional backand- forth exchange, particularly with associates, utilizing pointed questions and strategic prodding through which Adam teased out each author’s best work. He trained a generation of young Pomerantz attorneys to write cogently and to transform arcane legalese into fresh, accessible narrative.

Did we mention Adam’s sense of humor? Whenever possible – and appropriate – he brought a playful sensibility to his musings on corporate malfeasance, official obstructionism and just plain ridiculousness. Sometimes the humor was in his headlines, as with a 2013 article he wrote that began:

As JPMorgan Chase struggled to put the finishing touches on its $13 billion settlement with the federal government over its misadventures in the mortgagebacked securities area, a major ingredient in the government’s success seems to have come from out of nowhere – or, more precisely, from the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). This provision, enacted in the wake of the savings and loan meltdown of the 80’s, has been pulled out of the mothballs to punish some of the misbehaving financial institutions that brought about the financial crisis of 2008. The article’s headline: “FIRREA: No, It’s Not a Disease, Unless You Are a Naughty Financial Institution.”

According to Managing Partner Jeremy Lieberman, “In many ways, the Monitor serves as the Firm’s voice for the 21st century, allowing us room to explore critical rulings, issues and developments that we believe are important for our clients to be aware of and better understand. Adam was key in elevating these conversations at every step and building a publication that we are all proud to share.”

After sixteen years at the helm of the Monitor, this is Adam’s last issue. The Monitor will sally forth, while Adam segues into a well-deserved retirement. We thank you,

Q&A with Murielle Steven Walsh

INTERVIEW WITH ATTORNEY: MURIELLE STEVEN WALSH | POMERANTZ MONITOR | MARCH/APRIL 2020

From class actions involving #MeToo misconduct (Ferris v. Wynn Resorts Ltd.), wearable health technology (Robb v. Fitbit Inc.), and digital games that create real-world nuisances (Pokémon Go), Pomerantz partner Murielle Steven Walsh has been at the forefront of many cutting-edge issues that are not only challenging society and shareholder values, but also challenging the scope of securities law with novel and untested legal theories. Since joining the Firm in 1998, she has prosecuted numerous high-profile, highly successful securities class action and corporate governance cases. Murielle was recently honored as a 2020 Plaintiffs’ Lawyer Trailblazer by the National Law Journal.

The ground-breaking litigation that you pursued as lead counsel in the Pokémon Go case involved gameplay in the digital world that crossed over to actions taken in the real world. Can you tell us more about that case?

MSW: Pokémon Go is an “augmented reality” game in which players use their smartphones to “catch” Pokémon in real-world surroundings. Niantic, the game’s creator, placed Pokémon and other game items on private property using GPS coordinates, thereby encouraging players to trespass onto those properties so that they could advance in the game. This naturally resulted in mass trespass and nuisance. We filed a case against Niantic alleging that it committed trespass by putting its game items on private property without permission. This case was a true trailblazer because the body of law on trespass to date had not addressed trespass by virtual objects. The court recognized that our claims were novel but denied the defendants’ motion to dismiss because “novel and open issues cut strongly against dismissal.”

We secured a very favorable settlement with defendants in which they agreed to quickly remove game items from private single-family properties upon request, and to take proactive measures to avoid placing game items on private property in the future. The defendants will also pay for an independent audit to make sure they are complying with all the settlement requirements.

As #MeToo-related litigation accelerates, what should companies be taking away when it comes to the actionability of their statements about their Code of Conduct? And should a Code of Conduct be held as a statement in its own right?

MSW: Recently, as a result of the #MeToo movement, investors have filed cases alleging that companies misled them by claiming to have a Code of Conduct to ensure legal compliance and a high standard of ethics, while at the same time their executives were engaging in sexual harassment and/or discrimination. A few courts have upheld these complaints and permitted the cases to proceed, showing that corporations must be more vigilant about their executives’ misconduct because this information is increasingly very important to investors.

Pomerantz is representing investors in a class action against Wynn Resorts. The case alleges that Wynn’s founder and CEO, Steve Wynn, had been engaging in egregious sexual misconduct against the company’s female employees, that Wynn’s senior management was actively covering up his conduct, and that the Company failed to report the misconduct to gaming regulators as legally required. While all this was happening, the company was falsely assuring investors that it was committed to enforcing legal and ethical conduct, and at one point outright publicly denied that it had withheld information from regulators. On May 27, 2020, the court granted the defendants’ motion to dismiss, but granted us leave to amend, which we will certainly do, and we are hopeful that the court will sustain our amended pleadings. We feel strongly about this case and we always believe in fighting the good fight.

With the Allergan litigation, you successfully prevailed against a motion to dismiss based on the claim that a statement was literally true but actually misleading. Can you elaborate on the nuance of that position in this case?

MSW: The case against Allergan, which manufactures textured breast implants, challenges the defendant’s statements during the class period about a “possible link” between breast implants generally and the development of a rare but potentially fatal lymphoma, ALCL. But they didn’t disclose that their products had actually been associated with a higher risk of ALCL than other manufacturers. So, even though Allergen’s statement disclosing “a possible link” between ALCL and implants was a literally true statement, it was nonetheless misleading because it conveniently omitted the fact that their products specifically were linked to a higher incidence risk. Thus, the defendants took a literally true statement and softened it to the point that it was misleading. Courts have gone both ways on this issue, but in this case the court sided with us.

Your work on EBC I v. Goldman Sachs led to a landmark ruling involving the fiduciary duty that underwriters owe to IPO issuers. What was the biggest challenge that you faced in making this case?

MSW: We represented a bankrupt issuer, eToys, in a case against the lead underwriter of its IPO, alleging that it breached its fiduciary duty by underpricing the IPO. The underwriter had an incentive to underprice because it allocated the shares to its favored clients, who reaped huge profits by immediately flipping the shares. At the time, this was quite a novel claim. Goldman Sachs argued that the lead underwriter-issuer relationship is an arm’s length transaction, and no more. But we were able to convince the Court that a fiduciary duty can arise where the issuer relies on the underwriter and its superior expertise to price the IPO with the client’s best interests in mind.

The typical compensation structure in an IPO further supports a fiduciary duty claim. The lead underwriter earns its fee as a certain percentage of the IPO price - which would give the issuer even more reason to believe that the underwriter’s interests were aligned with the issuer in pricing the stock as high as possible.

The trial court agreed with us and upheld the fiduciary duty claim, and Goldman Sachs appealed the issue up to the New York Court of Appeals. We prevailed there as well and obtained a landmark decision.

Can you speak about your work as a member and Secretary of the Board of Trustees of CASA (Court Appointed Special Advocates of Monmouth County)?

MSW: I serve on the executive committee of the Board of Trustees for CASA in Monmouth County. At CASA, volunteers are trained to work on cases that involve children who were removed from their homes because of abuse or neglect. After removal, the court has to step in to determine the long-term placement of the child. Before CASA was founded, courts didn’t have enough factual information about a child’s specific situation in order to make this very critical decision. CASA volunteers work with the child, gather facts about the child’s family and specific situation, and identify what other supportive individuals the child has in her or his life. With this information, they make a recommendation to the judge regarding long-term placement. In many cases, CASA volunteers are the only consistent adult presence for the child during this very traumatic time. CASA’s work is so important, and I’m proud to be part of it.

Learn more about Murielle in her Lawyer Limelight on Lawdragon and in her Pomerantz bio.  

Director Oversight: Seeking the Holy Grail

ATTORNEY: GUSTAVO F. BRUCKNER | POMERANTZ MONITOR | MAY/JUNE 2020

Under Delaware law, corporate directors and officers are duty-bound to adopt internal control and reporting systems that are reasonably designed to provide them with timely, accurate information sufficient to make informed decisions. Directors and officers face a substantial threat of liability if they knowingly or systemically fail to (1) implement reporting policies or a system of controls; or (2) monitor or oversee the company’s operations. If the oversight failures result in losses to the company, the directors and officers responsible could be held personally liable. This claim is commonly referred to as a “Caremark” claim, in reference to the 1996 Delaware case that set out the legal standard governing a board of directors’ oversight obligations.

A Caremark claim is possibly the most difficult type to pursue in corporate law, as most do not even survive the pleading stage. To survive a motion to dismiss, the complaint must plead specific facts demonstrating that the board totally abdicated its oversight responsibilities. Even the court in Caremark, a case which involved indictments for Medicaid and Medicare fraud, could not conclude that such a breach had occurred in that case.

Later decisions further constrained Caremark’s applicability to preclude a claim of director liability based solely on ignorance of corporate wrongdoing. Rather, only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure that a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability under Caremark.

Commentators have characterized the successful pursuit of a Caremark claim as the Holy Grail of corporate law. Yet, just in the past year alone, Delaware courts have thrice allowed a Caremark claim to proceed. The first two of these cases, previously cited in the Monitor, Marchand v. Barnhill (Blue Bell) and In re Clovis Oncology, were examples of fiduciary duty breaches that resulted in extreme repercussions.

In Blue Bell, a listeria outbreak at one of the largest ice cream manufacturers in the country had resulted in three customer deaths. The court held, among other things, that the complaint fairly alleged that no board committee that addressed food safety existed; no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed; no schedule existed for the board to consider food safety risks on a regular basis; and the board meetings were devoid of any suggestion that there was any regular discussion of food safety issues. The Blue Bell court was focused primarily on the alleged failure of the board to have made a good faith effort to establish appropriate oversight systems in connection with a “mission critical” regulatory compliance issue.

In Clovis, by contrast, the focus was not on the failure to have an oversight system, but the alleged failure to pay attention to reports generated by that system. Clovis, a bio-pharmaceutical start-up, initiated clinical trials for its lung cancer drug, committing to a well-known clinical trial protocol and FDA regulations. The company consistently stated to the public and regulators that the drug achieved certain objective response rates in shrinking tumors. The Clovis board, however, had received internal reports that these rates were inflated. The Clovis court found that plaintiffs had successfully pled that the board had abdicated its responsibility by consciously ignoring red flags when it failed to correct the company’s reporting related to the success of its drug.

Most recently, in William Hughes Jr. v. Xiaoming Hu, et al. (Kandi Technologies), the court allowed a Caremark claim to proceed against several directors of Kandi Technologies Group, Inc., a Chinese auto parts manufacturer. Unlike in Blue Bell and Clovis, the breaches by the Kandi board did not have life or death implications. The claim in Kandi was that defendants “breached their fiduciary duties by willfully failing to maintain an adequate system of oversight disclosure controls and procedures, and internal controls over financial reporting.”

In 2014, Kandi publicly announced the existence of material weaknesses in its financial reporting and oversight system, including a lack of oversight by its Audit Committee and lack of internal controls for related-party transactions. The company pledged at the time to remedy these problems. Instead, in 2017, the company disclosed that it needed to restate the preceding three years of financial statements. In connection with this restatement, Kandi also disclosed that it lacked sufficient expertise relating to US GAAP requirements and SEC disclosure regulations, proper disclosure of related-party transactions, effective controls over proper classification of accounts receivables and payables; and the accuracy of income tax accounting and reporting.

Plaintiff made a request for production of books and records pursuant to Delaware General Corporation Law Section 220. In response, Kandi produced some documents and stipulated that “any remaining materials requested by Plaintiff either do not exist or had been withheld on privilege grounds.”

Plaintiff then brought an action claiming that the board’s actions were a Caremark violation. The books and records that were produced revealed that the Audit Committee of the Kandi board met only once every year, for less than an hour at a time. The Court concluded that it was reasonable to infer that during these short, infrequent meetings, the Audit Committee could not have fulfilled its responsibilities under its charter for a year’s worth of transactions. Additionally, during those short meetings, the Audit Committee purportedly reviewed new agreements governing the company’s related party transactions and approved a new policy that management had prepared governing related party transactions.

However, because these agreements and new policy were never produced to plaintiff in response to its inspection demand, the Court concluded that, pursuant to the stipulation, it was reasonable to infer that they neither existed nor imposed meaningful restrictions on company insiders. Furthermore, the Audit Committee, by unanimous written consent, replaced its auditor and attributed the decision to management’s determination that it was in the company’s best interest to change its independent auditors.

The Court concluded that these chronic deficiencies supported a reasonable inference that the Kandi board, acting through its Audit Committee, failed to provide meaningful oversight over the company’s financial statements and system of financial controls. The Court noted that, under Caremark, while an audit committee may rely in good faith upon reports by management and other experts, there must be some degree of board-level monitoring and not blind deference and complete dependence on management.

Lastly, defendants argued that, even if they failed to fulfill their oversight duties, they should not be subject to liability because the company did not suffer harm as a result. The Court found that argument misplaced. Even though there were no quantifiable damages to net income, defendants were still liable for damages incidental to the breach, including the costs and expenses incurred with the restatements, the reputational harm in the market, and the defense of the various stockholder litigations.

For plaintiffs’ lawyers, the Kandi decision reiterated the importance of seeking pre-suit books and records to bolster a litigation. It also provided a roadmap for inquiry as to the proper functioning of an audit committee. For corporate boards, Kandi evidenced that merely going through the motions will not be sufficient. The absolute minimum is simply not enough to avoid liability, even absent quantifiable damages. It may have also revealed that reaching the Holy Grail of corporate law need not be a matter of life and death.

Pomerantz Defeats Defendants’ Motion to Dismiss The Complaint Against Mylan Pharmaceuticals

ATTORNEY: VERONICA V. MONTENEGRO | POMERANTZ MONITOR | MARCH/APRIL 2020

On April 6, 2020, Pomerantz scored a major victory for investors when it defeated defendants’ motion to dismiss the third amended complaint in a securities class action against Mylan Pharmaceuticals, In re Mylan N.V. Securities Litigation. This ruling now allows discovery in the case to proceed in full.

Mylan, a drug company that markets a broad range of generic drugs as well as the EpiPen, a branded device that allows the user to autoinject a measured dose of epinephrine to treat anaphylaxis, a life-threatening emergency to which one in thirteen children is susceptible. The amended complaint alleges that Mylan and its executives committed securities fraud by (1) failing to disclose that Mylan was systematically and knowingly misclassifying the EpiPen as a generic drug in order to overcharge Medicaid by hundreds of millions of dollars for its purchases of this pen for Medicaid recipients; (2) failing to disclose that it had entered into exclusive dealing arrangements with commercial insurance companies and pharmaceutical benefit managers in order to prevent competitor Sanofi-Aventis from successfully introducing a product to compete with EpiPen; and (3) failing to disclose that it had entered into, and maintained, anticompetitive agreements with other generic drug manufacturers to allocate the market and fix the prices for virtually all of its generic drugs. The third amended complaint also added James Nesta, the Vice President of Sales and National Accounts at Mylan, as a defendant and provided allegations that Nesta was a central player in Mylan’s market allocation and price-fixing scheme.

With respect to misrepresenting the EpiPen as a generic drug, defendants argued that the statute was ambiguous in describing the classification and that defendants therefore could not have acted with scienter in designating the device as generic. The Court noted that the Right Rebate Act was passed for the express purpose of preventing Mylan from misclassifying the EpiPen and other drugs, and therefore, it “begs belief” that Mylan would be able to hide behind the Act in order to defeat plaintiffs’ allegations. Second, plaintiffs pled that the Centers for Medicare & Medicaid Services, the agency that administers Medicaid, explicitly told Mylan on multiple occasions that the EpiPen was misclassified, supporting the scienter claim irrespective of any alleged ambiguities in the classification system.

With respect to the exclusive dealings claim, the Court sustained plaintiffs’ allegations that Mylan offered anticompetitive rebates to price its competitor Sanofi-Aventis out of the market for epinephrine autoinjectors. The Court held that plaintiffs had adequately pled that Mylan consciously engaged in an anticompetitive rebate scheme for the purpose of forcing Sanofi from the market, and that Mylan’s top executives were personally involved in pricing and thus would have been well aware of the rebates. The Court also held that plaintiffs had sufficiently alleged loss causation in connection with the rebates by alleging that Mylan’s stock dropped as a result of the public outcry due to the high price of EpiPen—itself a result of Mylan’s anticompetitive conduct—and continued to drop even further when the FTC announced that it was investigating Mylan. As the Court reasoned, a stock price decline following the revelation of an investigation into a particular business practice can be sufficient to support loss causation with respect to alleged misstatements regarding that practice.

With respect to claims concerning anticompetitive agreements, the Court allowed plaintiffs’ claims of failure to disclose price fixing and market allocation to proceed with respect to 21 generic drugs.

Finally, the Court permitted plaintiffs’ claim for scheme liability to proceed against Mylan Vice President Jim Nesta. Mylan argued that plaintiffs had not adequately pleaded that Nesta committed the requisite deceptive or manipulative acts necessary to allege scheme liability. However, the Court held that plaintiffs had, indeed, adequately alleged that Nesta participated in Mylan’s anticompetitive scheme by submitting cover bids that were intended to create the false impression that they were competitive. It held that “Because this Court concludes that the submission of cover bids is a deceptive act sufficient to support a scheme liability claim, Plaintiffs’ claims against Defendant James Nesta survive.” With scant precedent for scheme liability in securities litigation, this opinion sets an important precedent.

COVID Cases: Three Securities Fraud Class Action Lawsuits Born in The Wake of A Global Pandemic

ATTORNEY: JAMES M. LOPIANO | POMERANTZ MONITOR | MARCH/APRIL 2020

Amid the hurricane-like impact of the COVID-19 pandemic, as businesses struggle to mitigate the impacts of an economic downturn caused by a bevy of disruptive market forces—reduced foot-traffic, shelterin- place orders, work-from-home protocols, among others—a crop of interesting securities fraud cases have sprung up. While some remain in the early stages of investigation, others have developed into fully-fledged class action lawsuits under the umbrella of the federal securities laws.

Collectively, these cases demonstrate some of the myriad ways that businesses have allegedly misbehaved during the pandemic. Discussed here are just three examples of complaints related to COVID-19 that have recently been filed in federal court alleging violations of the federal securities laws. Each provides an interesting perspective on how COVID-19 has impacted businesses and investors in disparate fields—from travel, to technology, to finance.

Norwegian Cruise Line Holdings Ltd.

It is well-known how the pandemic shut down the travel industry, particularly for those offering cruise packages. Norwegian Cruise Line Holdings Ltd. (“Norwegian”) is a publicly traded global cruise company that operates the Norwegian Cruise Line, Oceania Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises brands. Firms initiated securities fraud investigations against Norwegian following publication of a Miami New Times article, which reported that several leaked internal emails appeared to show that Norwegian managers were asking sales staff to lie to customers regarding COVID-19 to protect the company’s bookings. According to the article, one such email directed Norwegian’s sales team to tell customers that the “Coronavirus can only survive in cold temperatures, so the Caribbean is a fantastic choice for your next cruise.” Following the article’s publication, Norwegian’s stock price fell sharply, thus prompting the investigations.

Since the article’s publication, two securities fraud class actions have been filed against Norwegian in the United States District Court (“USDC”) for the Southern District of Florida, alleging violations of federal securities laws. Both complaints allege, among other issues, that Norwegian engaged in dubious sales tactics to allay customer fears over possible health risks, using unproven or blatantly false statements about COVID-19 to entice them to book cruises, thus endangering the lives of both their customers and crew members.

These lawsuits not only exemplify the potential need for businesses to reduce sales expectations and related pressures on employees amid a pandemic, but also to ensure that those in management positions are taking the pandemic seriously enough—whether interacting with staff internally, or interacting with potential customers and investors, who put both their money and their lives on the line when relying on the company’s statements.

Zoom Video Communications, Inc.

Zoom Video Communications, Inc. (“Zoom”) operates a digital video communications application that exploded in popularity with the COVD-19 pandemic. From 10 million people on Zoom daily as of December 2019, that number has ballooned to approximately 300 million in mid-2020. Until recently, at least, the company’s video conferencing services were widely viewed as one of the best alternatives to in-person meetings for both professional and personal circles, especially in light of the social distancing constraints caused by the pandemic.

Problems blossomed almost as fast as the service itself. Firms initiated securities fraud investigations against Zoom following disclosures during the pandemic related to alleged undisclosed cybersecurity weaknesses and privacy violations—with just one example being “Zoom bombings,” nicknamed after incidents where malicious third parties had hacked their way into Zoom meetings.

These allegations came to a head in late-March 2020, when major organizations including NASA, SpaceX, and New York City’s Department of Education—all of which previously relied on Zoom for remote employee communication—banned Zoom’s use following news that it shared certain user data with Facebook, even if Zoom users did not have a Facebook account. These organizations also cited allegations that Zoom’s video encryption capabilities were not as secure as the company had previously claimed. Adding insult to injury, on April 1, 2020, Yahoo! Finance reported that a malicious actor in a popular dark web forum had leaked 352 compromised Zoom accounts’ email addresses, passwords, meeting IDs, host keys and names, among other personal information. One such account reportedly belonged to a major U.S. healthcare provider, and seven more to various educational institutions. The impact of these disclosures was particularly alarming given Zoom’s widely touted use among businesses and the public during the pandemic. Zoom’s stock price fell sharply following these disclosures, prompting firms to investigate.

Since these issues came to light, two securities fraud class actions have been filed against Zoom in the USDC for the Northern District of California. Both complaints allege, among other issues, that Zoom had inadequate data privacy and security measures, that, contrary to Zoom’s assertions, its video communications service was not end-to-end encrypted, and that, as a result, Zoom’s users were at an increased risk of having their personal information accessed by unauthorized parties. These concerns were magnified by the platform’s exponentially expanded use during the COVID-19 pandemic, which had essentially turned Zoom into a household name for consumers. With so many businesses and families relying on Zoom’s services for remote communication, the importance of Zoom’s touted security advantages arguably expanded in the public mindset, thus potentially making inaccuracies in statements concerning such security even more devastating for shareholders.

iAnthus Capital Holdings, Inc.

iAnthus Capital Holdings, Inc. (“iAnthus”) is a Canadian holding company whose principal business activity is to provide shareholders with diversified exposure to best-in-class licensed cannabis cultivators, processors, and dispensaries throughout the United States. iAnthus is also heavily leveraged and relies on equity and debt financing to fund its operations.

Securities fraud lawsuits were initiated against iAnthus following its announcement on April 6, 2020 that it did not make interest payments due on certain debentures on March 31, 2020, as a result of financial hardship related to COVID-19. iAnthus’ stock price fell sharply following the announcement.

A securities fraud class action complaint has been filed against iAnthus in the District Court for the Southern District of New York. The complaint does not so much allege that iAnthus’ missed interest payments were themselves indicative of fraud—after all, many businesses are at risk of default, or have already defaulted, on payments following COVID-19 related difficulties. Rather, the complaint takes issue with iAnthus’ previous representations that it would use certain funds withheld and escrowed under debenture agreements to make those payments. According to the complaint, that money was set aside to prevent an interest payment default, yet defendants never disclosed that the escrowed funds had ever been released, exhausted, or were otherwise unavailable to satisfy interest payment obligations. Consequently, the complaint alleges that iAnthus’ statements concerning the agreements were false or misleading in light of iAnthus’ decision not to use the funds when needed.

Here, circumstances arising from the COVID-19 pandemic arguably called iAnthus’ bluff, so to speak, with respect to using the funds at issue in the manner it previously touted.

In Sum

As with society at large, these cases, and others that are sure to follow, are just a small indication that COVID-19 is making an indelible mark on securities litigation as this sudden pandemic has uprooted life, business, and the markets.

Lessons for COVID-19

ATTORNEY: JENNIFER PAFITI | POMERANTZ MONITOR MARCH/APRIL 2020

At the end of 2019, the world began to hear of an infec­tious respiratory disease referred to as Coronavirus, now identified as COVID-19. In early 2020, we learned that the disease was spreading globally and on March 11, 2020 the World Health Organization (WHO) declared the virus to be a global pandemic, pushing the threat beyond the Global Health Emergency the WHO had announced in January.

At the time of this writing, many of us are experiencing a new way of life as schools have closed, social distancing is the norm, non-essential travel is discouraged, and busi­nesses close their offices.

At Pomerantz, we are closely monitoring developments and adhering to local guidelines as well as guidelines issued from the Centers for Disease Control and Prevention and the World Health Organization. We want to ensure that we are taking every step possible to protect the health and safety of our clients, employees, advisory partners and their families.

As part of our business continuity plan, we have imple­mented several sensible policies, including conducting meetings remotely and encouraging many of our employ­ees to work from home, even before it became mandatory. Our client-focused approach combines legal expertise with the latest technological tools to allow us to operate from our offices, or remotely, to ensure that it is business as usual for our clients.

Until COVID-19, a normal working week for Jennifer Pafiti, Pomerantz Partner and Head of Client Services, included travel across the globe to meet with and advise clients, and to participate in educational events for institutional inves­tors. Drawing from her experience, she has put together a few recommendations for being productive while working outside of a regular office setting:

1. Consider your workspace – Make sure your work­space is as comfortable and functional as possible. Having a dedicated workspace (even if just a seat at the dining table) will allow you to go into ‘work mode’ much like when you arrive at your regular place of work.

2. Get to work! – Set a routine similar to timings and hab­its you would have as part of your regular workday. For example, being dressed and ready to work by 9 a.m. or taking your regular lunch break should form part of your remote working day.

3. Avoid distractions – Avoid unnecessary distractions by logging out of social media accounts and setting a schedule of work that allows for breaks but also makes sure your “to-do” list is attended to.

4. Communicate with colleagues – Keeping in touch with colleagues and maintaining good communication is vital to minimize disconnection from your team. Call, email and take advantage of some of the fantastic technology available today to still enjoy face-to-face meetings, just from a distance! At the end of 2019, the world began to hear of an infec­tious respiratory disease referred to as Coronavirus, now identified as COVID-19. In early 2020, we learned that the disease was spreading globally and on March 11, 2020 the World Health Organization (WHO) declared the virus to be a global pandemic, pushing the threat beyond the Global Health Emergency the WHO had announced in January.

Pomerantz, as the oldest law firm in the world dedicated to representing defrauded investors, has weathered many storms. Since its founding by legendary attorney Abe Pomerantz in 1936, the Firm and its clients have endured through the tail end of the Great Depression, World War II, Black Monday (1987), the early 1990’s re­cession, and the 2008 banking crisis. Today, as the world faces yet another crisis, Pomerantz and its clients will weather it together.

On behalf of the entire team at Pomerantz, we wish our readers, their families, friends, and loved ones good health. Stay safe!

For real-time updates on the latest situation with COVID-19, please refer to information provided by the World Health Organization (www.who.int), the Centers for Disease Control and Prevention (www.cdc.gov) and official, local resources specific to your region.

Challenging Foreign Companies in U.S. Courts

ATTORNEY: HEATHER VOLIK | POMERANTZ MONITOR MARCH/APRIL 2020

As Monitor readers are well aware, in Morrison v. National Australia Bank Ltd. the Supreme Court held that the antifraud provisions of the Securities Exchange Act apply only to “transactions in securi­ties listed on domestic exchanges, and domestic transactions in other securities.” But what about so-called ADRs, American Depositary Receipts, which are securities traded in the U.S. that are linked to the price of underlying foreign securities?

ADRs are negotiable certificates issued by U.S. depositary institutions, typically banks, which represent a beneficial interest in a specified number of shares of a non-U.S. company. Some of these ADRs are “unspon­sored,” meaning that they were not created by the foreign issuers themselves, but rather by unrelated entities that purchased stock of the foreign issuer overseas and now want to trade interests in those shares in the U.S.

This issue arose in the case of Stoyas v. Toshiba Corporation, whose shares trade only in Japan; but Toshiba ADRs are traded over the counter in the U.S. When Toshiba disclosed that it had used improper accounting techniques that overstated profits and concealed losses, the price of Toshiba’s shares in Japan dropped sharply, as well as the price of the ADRs in the U.S. When those ADR purchas­ers sued Toshiba in federal court in the U.S., Toshiba moved to dismiss, arguing that it had nothing to do with the sales of the ADRs and that, in any event, sales of those ADRs were not conducted on a do­mestic exchange and could not be considered to be domestic transactions, as required by Morrison. The district court granted the motion, denying leave to amend the complaint on the ground that any amend­ment would be “futile.”

The Circuit Court reversed, holding that an amend­ment to the complaint might not be futile. The defedants sought certiorari with the Supreme Court, which denied the petition after the solicitor general recommended declining review because the purchases were domestic.

Plaintiffs amended their complaint to add more de­tails concerning the nature of the ADRs and where they were purchased. Toshiba then moved to dismiss again, arguing that the plaintiffs failed to allege that Toshiba was involved in a “domestic transaction.” Toshiba ignored much of the complaint and surmised instead that the plaintiffs must have purchased their Toshiba shares on the Tokyo exchange, and then con­verted them into ADRs to trade in the U.S.

In January 2020, the Central California district court rejected Toshiba’s assertion and concluded that the amended complaint supported the contention that transactions actually occurred in the U.S. In reach­ing that conclusion, the court relied on the allegations that the investment manager and broker, the OTC Link trading platform which routed the order, and the re­cording of the transfer of title, were all in New York.

The court also found that the foreign-based fraud was “in connection with” the purchase of those securities. The defendants had argued that Plaintiffs had not shown that “the fraudulent conduct ‘induced’ Plaintiffs to exchange Toshiba common stock for the unsponsored ADRs from Citibank, or that Toshiba had anything at all to do with that transaction.” The court noted that plaintiffs had alleged “plausible consent to the sale of [Toshiba] stock in the United States as ADRs” with pleading that “it is unlikely that [that] many shares could have been acquired on the open market without the consent, assistance or par­ticipation of Toshiba.”

The court also held that there was no strong policy interest in limiting liability of foreign companies. “The nationality of the parties here similarly weighs in favor of strong U.S. interests: Plaintiffs are U.S. nationals and the proposed class is composed of U.S. nationals only. In the absence of an identifiable foreign or public policy interest in relation to the regulation of securi­ties, specifically, the court concludes that the United States has significant interests in regulating securities transactions made in the United States.”

This decision should open claims of liability by U.S. investors against foreign issuers under 10(b), even when the issuers had limited involvement in the issu­ance of the securities in the United States and the mis­statements were made in a foreign country. The deci­sion provides a formula for successful claims against foreign corporations, including alleging the specific connections to the U.S. market that link the foreign issuer to the purchase.

Who's Really in Control? And Why Does It Matter?

ATTORNEY: DARYOUSH BEHBOOD | POMERANTZ MONITOR MARCH/APRIL 2020

Today, most (if not all) Delaware corporations protect their board members through certain exculpatory pro­visions included in their certificates of incorporation. These provisions, as authorized by 8 Del. C. § 102(b) (7), eliminate the personal liability of a director for breaches of the duty of care. However, exculpatory provisions cannot eliminate, or even limit, the liability of a director for any breach of the director’s duty of loyalty, acts of bad faith, intentional misconduct, self-dealing, or knowing violations of law.

Why is this important? When a stockholder alleges a board of directors breached their duty of loyalty, he or she can attempt to prove such a breach by dem­onstrating that the board members acceded to the will of a “controlling stockholder.” A putative class of stockholders (“Plaintiffs”) for Essendant, Inc. recently tried to apply this theory to uphold their complaint in a merger case called In Re Essendant, Inc. Stockholder Litigation. The decision highlighted the fine line that sometimes separates shareholders who actually con­trol a corporation, or a particular corporate decision, and those who don’t.

In the spring of 2018, Essendant signed a merger agreement with Genuine Parts Company (“GPC”), whereby Essendant would combine with a GPC af­filiate. The agreement contemplated a stock-for-stock transaction that would result in Essendant stock­holders owning 49% of the combined company. Sig­nificantly, the merger agreement contained a “non-solicitation” provision which prohibited Essendant from knowingly encouraging a competing acquisition proposal. The non-solicitation provision did not, how­ever, prohibit Essendant from considering alterna­tive unsolicited proposals, such as the one received by Essendant’s board of directors from Sycamore Partners. Sycamore submitted an offer to acquire Essendant for $11.50 per share in an all-cash transaction. Essendant’s board eventually determined that Sycamore’s offer was “reasonably likely to lead to a superior acquisition proposal” and invited GPC to exercise its matching rights. While Essendant was negotiating with GPC, Sycamore began acquiring Essendant’s stock on the open market, and eventually acquired an 11.16% interest in Essendant.

In September 2018, after further negotiations, Essendant announced that it had agreed to accept Sycamore’s revised acquisition proposal of $12.80 per share in cash. Essendant again extended a matching right to GPC, but GPC declined. The Sycamore merg­er ensued. Believing the merger with Sycamore to be unfair to Essendant’s public stockholders, Plaintiffs, representing a class of Essendant stockholders, filed a class action complaint against Essendant’s Board in October 2018.

In the complaint, Plaintiffs alleged breaches of fi­duciary duties flowing from the Board’s “failure to obtain the highest value reasonably available for Essendant by approving and recommending the Sycamore merger…” Plaintiffs further alleged that the Board “caved to the will of Sycamore [by] know­ingly and willfully allowing the GPC merger to be sabotaged by Sycamore so that Sycamore could acquire Essendant at an unfair price.” Plaintiffs also filed a claim against Sycamore for breaching its fiduciary duties as a controlling stockholder. In that regard, Plaintiffs alleged Sycamore “used its control against the interests of the non-controlling stockholders by pressuring the Essendant Board to accept its inadequate offer.”

Because Essendant had an exculpatory charter provi­sion protecting directors from claims alleging breach of their “due care” obligations, Plaintiffs’ complaint had to “invoke loyalty and bad faith claims.” Plaintiffs attempted to overcome this burden by, among other things, alleging that the directors breached their duty of loyalty by acceding to the will of Sycamore as a controlling stockholder. The Delaware Court of Chan­cery ultimately decided that Plaintiffs failed to meet this burden. In reaching its decision, the Court ana­lyzed whether the factual allegations of the complaint, if true, could establish that Sycamore was a “control­ling stockholder” in the first place.

In so holding, the Court of Chancery reaffirmed Delaware law that a stockholder is a controlling stock­holder only if it “(1) owns more than 50% of the com­pany’s voting power or (2) owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation” such that “as a practical matter, it [is] no differently situated than if it had majority voting control.” Plaintiffs could only succeed on this theory if the Court was able to conclude that Sycamore’s stake was “so potent that independent directors could not freely exercise their judgment, fearing retribution from Sycamore.”

This was difficult because Sycamore’s 11.16% stake was far less than 50% and, in fact, it was only the third largest shareholder of Essendant. Nor did the complaint allege facts supporting any claim that Syca­more exercised de facto control of the company. As the Court noted, “Sycamore did not (i) nominate any members of the Essendant Board, (ii) wield coercive contractual rights, (iii) maintain personal relationships with any of the Essendant Board members, (iv) maintain any commercial relationships with Essendant that would afford leverage in its negotiations, (v) threaten removal, challenge or retaliate against any of the Es­sendant Board members or (vi) otherwise exercise ‘outsized influence’ in Essendant’s Board room.”

In support of their claim that Sycamore exer­cised de facto control, Plaintiffs alleged that while Sycamore may not have exercised day to day control over Essendant, it managed to exert control with respect to this particular transaction, essentially by bullying the board and threatening it with a proxy contest for con­trol. In support of their theory, Plaintiffs relied on a Maryland case which applied Delaware law. The case involved a merger transaction and a pushy shareholder, Ares. There, the court found that Ares, an aggressive institu­tional investor that held a 13.2% stake in the company, managed to force the board to sell the company in a transaction that was unfair to the company’s stockhold­ers. According to the Maryland court, “the role played by [the shareholder], the apparent willingness of at least two other buyers…to pay a higher price, and the discount to book value [in the approved transaction] gives credence to the plaintiffs’ contentions that the board knew that Ares’ bid substantially undervalued the Company, but brushed this concern aside because it was worried about losing a proxy battle…” The Court also held that the complaint alleged facts showing that Ares had inserted itself into the board’s deliberations and procured a $3 million fee for itself for its “advisory” services in pushing the deal through.

In Essendant, the Court did not rule on the legal merit of the “bullying” theory of control over a single transac­tion. Instead, it held that Plaintiffs’ complaint did not allege the type of behavior that occurred in the Mary­land case. No bullying, no controlling stockholder.  

When a board of directors loses control of its compa­ny, it can certainly have broad implications. However, as Essendant makes explicitly clear, the argument that a company’s board of directors so lost their will to lead that a controlling stockholder was able to force a merger that was unfair to everyone but the stockholder in control, is a theory proving to be more and more difficult for plaintiff stockholders to support. Following an appeal of this decision, the Essendant Plaintiffs will have another bite at the apple in front of the Delaware Supreme Court.

Intuit Shareholders and Directors Reject Forced Arbitration Proposal

ATTORNEY: JARED M. SCHNEIDER | POMERANTZ MONITOR MARCH/APRIL 2020

While ardent disputes between investors and management about conducting securities litigations might not be newsworthy, their rare agreements are. One such agreement occurred at the meeting of Intuit’s share­holders on January 23, 2020. Harvard Law’s Nomura Professor Emeritus Hal Scott, an activist for forced securities arbitrations, filed a shareholder proposal (as trustee of the Doris Behr 2012 Irrevocable Trust) that would have waived the right to bring class action claims against the company. Professor Scott wanted Intuit’s shareholders to be required to submit individual claims to mandatory arbitration in the event that Intuit violated the securities laws, instead of being able to file a class action in court.

Despite the proposal’s assurances that “arbitration is an effective alternative to class actions” that “can balance the rights of plaintiffs to bring federal securities law claims with cost-effective protections for the corporation and its stockholders,” Intuit’s board of directors ultimately recom­mended voting against the proposal, finding it “not in the best interest of Intuit or its shareholders.” Over 97.6% of Intuit’s shareholders agreed.

The overwhelming rejection of the mandatory arbitration proposal by Intuit’s board and shareholders makes sense. Forced arbitration is not the grand balancing of interests between these two groups that its supporters claim it to be, and instead harms shareholders, the broader market, and even the companies themselves.

For an individual investor, prosecuting a fraud claim against a public company is a remarkably expensive, risky, and time-consuming proposition. Under the Federal Rules of Civil Procedure, an ordinary plaintiff’s complaint is only required to contain a “short and plain statement” explaining why the plaintiff is entitled to relief. However, since 1995, the pleading requirements to allege a claim for securities fraud have favored management’s interests. To state a claim under the management-endorsed Private Securities Litigation Reform Act of 1995, victims of se­curities fraud must allege specific, particular facts about (a) which statements were false or misleading (including who made the statements, when they were made, and in what context they were made); (b) why those statements were false; and (c) a strong inference—at least as com­pelling as any competing inference—that the maker of the false statements knew, or was reckless in not knowing, that they were false.

By itself, establishing sufficient particular facts to allege that a statement is false presents a significant challenge. But requiring the investor to uncover additional facts es­tablishing that the company knew the statement was false, without the benefit of reviewing the company’s internal documents or speaking with its current employees, makes this challenge a high hurdle bordering on clairvoyance.

Prosecuting a securities fraud action is frequently a years-long, multi-million-dollar endeavor. Thus, if shareholders who were subject to forced arbitration became victims of a company’s securities fraud, only the company’s larg­est shareholders (i.e., its closest and most sophisticated investors) would be able to recover their losses through individualized mandatory arbitrations.

Beyond providing a way for investors to recover losses due to fraud, securities class actions are prophylactic, protect­ing both current stockholders and the broader market. Re­search indicates that, with all else being equal, a person is more likely to lie when there is a lower chance that they will be caught lying, or when the probable punishment (financial or reputational) is slight. A system that provides account­ability, like the current one for class action securities litiga­tion that enables private persons to uncover and prosecute fraud as well as recover their losses, serves as a deterrent and increases the likelihood of bringing fraudsters to justice over a system that does not (such as individualized manda­tory arbitration). Similarly, the specter of a damages judge­ment that encompasses the losses in all of a company’s public shares will act as a better deterrent than damages based off of a small percentage of those shares.

Aside from the enhanced deterring effect of class actions above individualized mandatory arbitrations, the nature of public litigation and the potential for appellate review forces judges to issue written and, ideally, well-reasoned decisions. These decisions form the body of law for securi­ties-fraud claims and help to define the contours and limits of permissible conduct. Private arbitrators, who are usually not subject to appellate review and issue confidential deci­sions, do not have the same motivation to issue reasoned decisions or to form precedence. Forced arbitration need­lessly increases uncertainty and risk in markets that are already uncertain and risky.

In various interviews, Professor Scott supposes that class actions for securities fraud actually hurt shareholders because such lawsuits merely move money from one group of shareholders to another. This sophistic analysis, however, is both wrong and misguided as it ignores the significant societal goods that attend a robust practice of litigating claims of securities fraud. Securities fraud suits are not the cause of the harm to the company’s current shareholders. The company’s fraud causes the harm and resulting destruction in value, not the subsequent efforts to recover investors’ losses caused by that misconduct. Moreover, as explained above, the threat of pri­vate litigation to enforce the securities laws helps to keep capital markets honest.

The market’s understanding that bad actors will be punished for their misdeeds translates to in­vestor confidence in the integrity of the market for public securities. Conversely, if the market understood that toothless mandatory arbitration provisions would allow public companies and their insiders to commit fraud with impunity, investors’ confidence in those companies—and the market in general—would be curtailed. Thus, refusing mandatory arbitration makes sense from management’s perspective as well. Why would investors want to invest in a company that was allowed to defraud them?

The market’s exploration of mandatory arbitration provi­sions is developing. Aside from Intuit, only one other Amer­ican company, Johnson & Johnson, has considered such a provision (also brought by Professor Scott). After Johnson & Johnson refused his attempt to include a mandatory arbi­tration shareholder proposal in the company’s proxy state­ment, Professor Scott sued. Pomerantz has been retained by the Colorado Public Employees’ Retirement Associa­tion to intervene in the Johnson & Johnson proxy litigation to ensure that investors’ rights are protected. Pomerantz Partners Marc I. Gross and Michael Grunfeld discussed this litigation in the May/June 2019 issue of the Monitor.

Even prior to intervening in the Johnson & Johnson proxy litigation, Pomerantz was no stranger to the fight against forced arbitration. When the SEC and U.S. Treasury de­partment signaled a potential policy shift toward forced arbitrations, Pomerantz took action. The Firm organized an international coalition of institutional investors to meet with SEC Chairman Jay Clayton and congressional staff, to caution against allowing forced arbitration/class action waiver bylaws. As a result of Pomerantz’s advocacy, ten Republican State Treasurers, in a letter co-authored by the State Financial Officers Foundation, urged the SEC to maintain their existing stance against forced arbitration. “It is a significant and unusual step to have ten Republican Treasurers publicly take a position contrary to two Repub­lican SEC Commissioners and the Treasury Department,” wrote partner Jennifer Pafiti in an article on the subject in the November/December 2018 issue of the Monitor. Look for updates on the fight against forced arbitration in future issues of the Monitor as the issue is analyzed by the courts.

Look for updates on the fight against forced arbitration in future issues of the Monitor as the issue is analyzed by the courts.

Delaware Rules on Books and Records

ATTORNEY: H. ADAM PRUSSIN | POMERANTZ MONITOR JANUARY/FEBRUARY 2020

In Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp., investors recently won a significant victory in a case seeking access to defendants’ books and records under Section 220 of the Delaware Corporation Law. Section 220 allows stockholders to inspect corporate records if they have a “proper purpose” in seeking disclosure. One such proper purpose is established if they have a reasonable basis for suspecting wrongdoing by directors or management.

AmerisourceBergen is a distributor of pharmaceuticals, including opioid pain medications. It has been accused in a host of other lawsuits of recklessly distributing massive amounts of opioids to many so-called “rogue” pharmacies, amounts well in excess of any possible legitimate uses. These lawsuits include multi-district litigation brought by cities, counties, Indian tribes, union pension funds, and the attorneys general of virtually every state against distributors of opioids. Analysts have estimated that resolution of all these cases will likely result in payouts by the three main opioid distributors, including AmerisouceBergen, in the $100 billion range. It seems unsurprising, under these circumstances, that stockholders in the company would have a legitimate concern in determining whether directors or management did something wrong.

For decades the Delaware courts have been urging shareholders to use the “tools at hand,” inspection of corporate records under Section 220, to discover specific facts before commencing litigation against the company or its officers and directors. With those specific facts, stockholders who do decide to bring an action will be better able to plead claims with enough detail to survive the inevitable motion to dismiss.

In this case the investors’ demand for inspection stated that they sought to “investigate whether the Company’s Directors and Officers have committed mismanagement or breached their fiduciary duties” by failing to assure themselves that the company was avoiding suspiciously large sales to rogue pharmacies.

Given the magnitude and seriousness of the litigations that were already swirling around the company, one would have thought that it would be easy to show that the investors had a “reasonable basis” to infer that mismanagement or other breaches of fiduciary duty may have been committed. The court agreed, holding that “the wave of government investigations and lawsuits relating to AmerisourceBergen’s opioid-distribution practices is sufficient to establish a credible basis to suspect wrongdoing warranting further investigation.”

In recent years, some cases have upped the ante in requirements investors must meet to satisfy the “reasonable basis” burden. Notable was a Section 220 case brought by Pfizer stockholders, where the court seemed to agree that before they could look at any books and records, stockholders had to show that they already had evidence of actionable wrongdoing.

Vice Chancellor Laster, however, held that this is not the applicable standard on an action under Section 220. Noting that the “credible basis” standard is “the lowest possible burden of proof,” he held that it does not require that the investors prove that they already had enough facts and evidence to prevail on a specific breach of duty claim. If that were the standard, the investors would have no need to inspect the records. The court held that the reasonable basis standard was satisfied here because “there are legitimate issues of wrongdoing. … The stockholder need only establish by a preponderance of the evidence that there is a credible basis from which the court can infer a possibility of wrongdoing. A stockholder is not required to prove by a preponderance of the evidence that wrongdoing and mismanagement are actually occurring” or even that they are probably occurring. A plaintiff may meet the “credible basis” standard by making “a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.”

Since this was not a decision of the Delaware Supreme Court, we cannot say that this issue has been definitively resolved for all cases. But for now, it helps. A lot.

“Corporate Social Responsibility” and the Institutional Investor

ATTORNEY: JESSICA N. DELL | POMERANTZ MONITOR JANUARY/FEBRUARY 2020

In the last issue of the Monitor, Tamar Weinrib reported on the recent, surprising statement issued by the Business Roundtable (“BRT”), stating a new objective for corporations is to “ensure more inclusive prosperity” by encouraging companies to “build long term value by investing in their employees and communities.” Continuing a decades-long debate about “corporate social responsibility” (CSR), this statement was met with concern about accountability – not only because it would undermine the premise that corporations have responsibilities to shareholders above all, but because even for proponents of CSR there is a plethora of different codes and benchmarks and it is no small undertaking to achieve consensus about how to implement and measure such performance. It also puts an “ask” on investors, requiring closer oversight, including on index funds that may be less equipped or inclined to act as stewards.

Long before the BRT statement, “socially responsible investments” (SRI) and Environmental, Social and Governance (“ESG”) factors have been addressed by institutional investors aiming to factor these practices into their investment processes without compromising their risk– return objectives. Many, if not most, pension funds and asset managers take their stewardship responsibility seriously, fighting vigorously for shareholder rights and corporate governance reform. They often engage with companies before they invest, asking the tough questions.

Institutional investors may have less agency when investing in mutual funds. Morningstar recently published sobering news on the voting trends of the largest three index funds: Vanguard, Black Rock, and State Street Global Advisors (SSGA). In 2017, it had been much publicized that BlackRock and Vanguard voted to require Exxon Mobil to produce a report on climate change, so it was startling when Morningstar revealed that those two funds currently hold the worst voting records on social issues supported by other shareholders. In 2019, 84 resolutions addressing social factors received the support of more than 30% of shareholders, but BlackRock and Vanguard supported only 10% of these resolutions.

As Lucian Bebchuk of the Harvard Corporate Governance Project explains, the “agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers.” And he predicts that if the trend continues, the disparities will become more glaring as these big funds become more dominant.

Although recent reports show that too often investors as a whole, in exercising their proxy rights, vote blindly with management, there are also signs that investors are evolving to play a more meaningful stewardship role. Investors have made, and can continue to make, significant impacts through ESG investing. In follow-up research on its 2017 report, Professor Bebchuck’s Project revealed that ESG investing has grown to $30+ trillion, over a quarter of the world’s professionally managed assets.

The debate over CSR is a global one. Responsibility for the 2008 financial collapse has been placed, in large part, on failures in corporate governance. Over sixty codes around the world are focused on the issues inherent to CSR goals. But there has been far less focus on a uniform approach for the investment side. Only two such codes exist. The U.K. first issued governance guidance specifically for institutional investors with the Stewardship Code in 2010, and Japan followed in 2014 with Principles for Responsible Institutional Investors.

The Stewardship Code is set by the Financial Reporting counsel (FRC) an independent regulator in the UK and Ireland overseeing auditors, accountants and actuaries, and setting the U.K.’s Corporate Governance and Stewardship Codes which apply to “fi rms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles.” The code, entirely voluntary, espouses seven principles:

• Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities.

• They should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

• They should monitor their investee companies.

• They should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.

• They should be willing to act collectively with other investors where appropriate.

• They should have a clear policy on voting and disclosure of voting activity.

• They should report periodically on their stewardship and voting activities

In response to criticism that the Code did not go far enough, additional provisions took effect on January 1, 2020, setting a higher standard. A statement from Sir Jon Thompson CEO of the FRC said “Asset owners and beneficiaries will be able to see if those investing on their behalf are doing so in accordance with their needs and views … they will also be able to see the impact of their managers’ decisions, particularly in relation to environmental, social and governance issues, including climate change.”

From the outset, the Stewardship Code came with a “Comply or Explain” approach: if institutional investors do not comply with any of the principles set out, they may explain any meaningful difference and provide justification on their websites.

This is all food for thought. Vague pledges for corporate responsibility from BRT CEOs do little to lead the way for either corporations or institutional investors. Pomerantz, aware of the complexities of decision-making faced by institutional investors—such as when and how “responsible” investing makes economic sense—regularly organizes conferences and educational events to address these very issues. At such events, institutional investors from around the globe share their expertise and compare notes on developments in their countries. Our next Corporate Governance Roundtable, to take place in June, will focus on the latest developments in ESG investing and corporate governance.

Insider Trading: A Way Around The “Personal Benefit” Requirement?

ATTORNEY: LEIGH HANDELMAN SMOLLAR | POMERANTZ MONITOR JANUARY/FEBRUARY 2020

Because no statute specifically outlaws insider trading, the elements of the violation have been developed by the courts, most often in cases alleging violations of Section 10(b) of the Exchange Act.

Recently, disputes have arisen concerning whether someone providing insider information to another person must receive a personal benefit in exchange for the “tip” and, if so, what constitutes an impermissible personal benefit. As the Monitor previously reported, in 2015, the Ninth Circuit issued a controversial decision in U.S. v. Salman upholding the insider trading conviction of a defendant who had received inside information from a family member. The legal issue was whether the “personal benefit” requirement requires a financial quid pro quo, or whether conferring a “gift” on a personal friend or relative is enough. The Ninth Circuit held that an insider‘s intent to benefit his brother by tipping the information to him was sufficient to create a personal benefit for the tipper. Because the tipper’s motivation was improper, the tippee’s conviction was upheld.

This holding departed from the Second Circuit’s 2014 decision in U.S. v. Newman, which held that prosecutors must show that the tipper received a “tangible” benefit beyond the psychic benefit of helping a friend or family member. In declining to follow Newman, the Ninth Circuit held that Dirks v. SEC, a 1983 Supreme Court decision, allowed Salman’s jury to infer that the tipper breached a duty because he made “a gift of confidential information to a trading relative.’’

The split among the circuits paved the way for the Salman decision to be appealed to the Supreme Court. On December 6, 2016, the Court sided with the Ninth Circuit, holding that it properly applied Dirks to affirm Salman’s conviction. Under Dirks, the jury could infer that the tipper personally benefited from making a gift of confidential information to a trading relative.

The Supreme Court held ‘’when an insider makes a gift of confidential information to a trading relative or friend ... [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.’’ In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds. The Court held that “[t]o the extent that the Second Circuit in Newman held that the tipper must also receive something of a pecuniary or similarly valuable nature in exchange for a gift to a trading relative, that rule is inconsistent with Dirks.”

Although the Court’s decision in Salman made it easier to prove insider trading, it did not eliminate the “personal benefit” requirement. More recently, the government has tried to circumvent this requirement entirely by criminally charging defendants under 18 U.S.C. § 1343 and § 1348, which criminalize wire and securities fraud, rather than under Section 10(b).

On December 30, 2019, in United States v. Blaszczak, the Second Circuit addressed for first time whether the government can criminally prosecute insider trading under Title 18 without proving personal benefit to the tipper. The Second Circuit upheld the convictions brought by the government under those provisions, finding that in such cases the government need not prove that the defendants received a “personal benefit” in exchange for the tip.

In Blaszczak, an employee of the Centers for Medicare and Medicaid Services (CMS) allegedly provided nonpublic information about prospective changes to certain Medicare reimbursement rules to his friend, Blaszczak (the tippee), who in turn provided the confidential information to analysts at his client, Management Company. Relying on this insider information, these analysts executed trades in health care companies that were affected by the rule change, realizing gains of over $7 million. The CMS tipper did not receive any money in exchange for the tip. The only “personal benefits” he received were free meals and tickets to sporting events, and an opportunity to work at the consulting firm where Blaszczak worked, which he ultimately turned down. The tipper and tippees were both charged with violating both 15 U.S.C. § 78j(b) of the Exchange Act (Section 10(b)) and with wire and securities fraud under 18 U.S.C. §§1343 and 1348.

The jury instructions for the Title 15 charge (violation of Section 10(b)) provided that the government had to prove that the tipper breached a duty by revealing material nonpublic information for a personal benefit, and that each tippee knew it. The court told the jury that personal benefit “need not be financial” and could be “the benefit one would obtain from simply making a gift … to a relative or friend.” However, in order to prove Title 18 charges, the government only had to prove that the defendants knowingly executed a scheme to defraud, which did not require personal benefit to the tipper or knowledge of that benefit by the tippee.

After a trial, the defendant was acquitted of the Exchange Act charges but convicted of the Title 18 charges. The verdict suggests that the government could not prove a personal benefit. In addition to not having to show a personal benefit to succeed on a Title 18 claim, the Court held that confidential government information may constitute “property,” the misappropriation of which can provide a basis for criminal liability under the Title 18 wire and securities fraud statutes.

The defendant appealed the jury verdict, mainly arguing that the government cannot use Title 18 wire and security fraud claims as a way around the doctrines the courts have developed for insider trading under Section 10(b) over the past forty years. Defendant argued that because Sections 1343 and 1348 contain the same operative fraud language as Section 10(b), the same elements that apply under the Exchange Act must apply under Title 18. Specifically, the defendant argued that the personal-benefit requirement should apply to Title 18 securities fraud. The majority of the Second Circuit panel rejected this argument, concluding that the personal-benefit requirement is inconsistent with Congress’s intent, through 18 U.S.C. § 1348, to provide the government with a broader mechanism for prosecuting securities fraud than that provided by Title 15.

The ruling in Blaszczak may alter the government’s future strategy for insider trading charges. The SEC’s enforcement jurisdiction is limited to civil charges under Title 15, in which case it must still prove a personal benefit consistent with Dirks. Accordingly, particularly in cases where a personal benefit on the part of the tipper is difficult to show, the DOJ may choose to bring prosecutions where the SEC declines, or the SEC may proceed under a different legal theory.

If the Blaszczak ruling is widely followed nationwide, it will change the landscape for insider trading liability, as the government can bring and win criminal claims under Section 18 while not being successful for civil claims under Title 15 for the same conduct. The government may bring criminal charges without bringing civil charges or may bring civil and criminal charges under different statutes with different proof.

Pomerantz Scores Critical Victory for Investors in Perrigo Company plc Litigation

ATTORNEY: JOSHUA B. SILVERMAN | POMERANTZ MONITOR JANUARY/FEBRUARY 2020

Pomerantz recently set important precedent for global investors. In the Perrigo securities litigation (Roofer’s Pension Fund v. Papa, et al.), Judge Arleo of the District of New Jersey certifi ed parallel classes of investors that purchased Perrigo shares in the United States on the New York Stock Exchange (“NYSE”) and in Israel on the Tel Aviv Stock Exchange (“TASE”). The ruling was the fi rst to certify a foreign purchaser class since the Supreme Court’s landmark 2010 ruling in Morrison v. National Australia Bank, Ltd.

Pomerantz Managing Partner, Jeremy Lieberman, commented, “We are very pleased with the district court’s decision granting class certification to both TASE and NYSE investors. We hope it paves the way for those investors that purchase on non-U.S. exchanges, particularly investors in dual-listed securities, to procure a recovery in the U.S. courts which would have otherwise been foreclosed by Morrison.”

Morrison appeared to close the door of U.S. federal courts to investors who purchased on foreign exchanges, reasoning that the Securities Exchange Act of 1934 was not intended to have extraterritorial effect. In that decision, the Supreme Court stated that “Section 10(b) [of the Exchange Act] reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”

Morrison was particularly limiting for investors in dual-listed shares, a staple of most global portfolios. Dual-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. However, under Morrison, two purchasers of the same dual-listed stock at the same time injured by the same fraudulent misrepresentations and omissions might have very different remedies, depending on the trading venue. Those that purchased on a U.S. exchange would be able to join together with other similarly situated investors to collectively seek compensation in a U.S. class action. Investors purchasing on a foreign exchange, under Morrison, were generally left to pursue claims individually in a foreign court likely to be less familiar with and less favorable to securities fraud litigation.

The Perrigo action offered the perfect opportunity to test the bounds of Morrison. Perrigo is a global pharmaceutical company that has been dual-listed on the NYSE and the TASE for more than a decade. In connection with its dual-listing, Perrigo had elected to take advantage of a provision of the Israel Securities Act providing that its disclosure obligations in Israel would be governed by the standards of its country of primary listing – here, the United States – rather than by Israeli standards. Thus, for companies like Perrigo, Israeli law applies the standards of Section 10(b) of the Securities Exchange Act of 1934 to assess claims of securities fraud.

Perrigo violated Section 10(b) by making material misrepresentations and omissions that injured investors whether they purchased on the TASE or the NYSE. Specifically, to defeat a hostile tender offer and to artificially inflate its share price, Perrigo concealed problems with its largest acquisition, Omega, and anticompetitive pricing practices in its generic prescription drug business. While Perrigo’s misrepresentations and omissions helped convince shareholders to reject the tender offer, shares plummeted as the truth was disclosed.

In the litigation that followed, 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.

Class certification proved a larger battle. Pomerantz asked the Court to certify three classes: a U.S. purchaser class, a TASE purchaser class, and a tender offer class for investors who held Perrigo shares at the expiration of the failed tender offer. We bolstered arguments for certifying the TASE purchaser class with expert reports from a world-class econometrician, demonstrating that Perrigo shares traded efficiently on the TASE, just as they did on the NYSE, and from an Israeli law professor explaining the identity between the Section 10(b) cause of action incorporated under the Israel Securities Act for dual-listed companies, and under U.S. law. While defendants conceded that Perrigo shares traded efficiently in the United States, they vigorously disputed the efficiency of TASE trading. As a result, defendants argued, TASE purchasers were not entitled to a presumption of reliance and individual issues regarding reliance would defeat predominance, rendering class certification inappropriate.

However, Pomerantz and its expert marshalled evidence demonstrating that TASE trading satisfied each of the criteria traditionally used to assess market efficiency under Cammer v. Bloom: volume, analyst coverage, market makers, float and financial disclosure requirements relevant to Form S-3 eligibility, and cause-and-effect relationship between dissemination of value-relevant company-specific information and abnormal returns in stock prices.

The Court accepted these arguments, finding that “the majority of the Cammer factors … tip the balance in favor of finding market efficiency” and that the TASE purchaser class was therefore also “entitled to the Basic presumption of reliance.” As a result, the Court certified all three proposed classes. Defendants did not challenge certification of the TASE purchaser class in their petition for interlocutory appeal, which was limited to the tender offer class.

We expect other courts to follow Judge Arleo’s lead. Exercising supplemental jurisdiction of foreign securities claims while adjudicating U.S. claims does not offend Morrison and offers substantial efficiencies that benefit both plaintiffs and defendants. Litigating all claims in a single forum avoids duplicative discovery and motion practice, eliminates the risk of inconsistent judgments, and facilitates global settlement discussions.

Pomerantz Corporate Governance Roundtable

WITH SPECIAL GUEST SPEAKER PRESIDENT BILL CLINTON

Pomerantz, in association with The Corporate Governance Institute, Inc., is pleased to announce that on June 16, 2020 they will host a Corporate Governance Roundtable Event at the Waldorf Astoria Hotel in Beverly Hills, California with special guest speaker, President Bill Clinton.

The Roundtable will gather institutional investors to discuss their evolving role in managing the risk of governance and ESG challenges under the theme: The Collective Power to Make Change. This one-day event will combine the knowledge and experience of fiduciaries, legal counsel and governance professionals from around the globe with the opportunity to discuss important matters that affect the value of the funds they represent.

We are honored to announce the attendance of President Bill Clinton at this event. President Clinton served as the 42nd President of the United States and founder of the Clinton Foundation. During his time in office, President Clinton led the U.S. to the longest economic expansion in American history, including the creation of more than 22 million jobs. He was also the first Democratic president in six decades to be elected twice.

After leaving the White House, President Clinton established the William J. Clinton Foundation with the mission to improve global health, strengthen economies, promote healthier childhoods and protect the environment by fostering partnerships among governments, businesses, non-governmental organizations and private citizens to turn good intentions into measurable results. To recognize the voice, vision and counsel of President Clinton’s wife, Secretary Hillary Clinton, and their daughter, Chelsea, in shaping the William J. Clinton Foundation, in 2013 it was renamed the Bill, Hillary & Chelsea Clinton Foundation.

Today the Foundation has staff and volunteers around the world working to improve lives through several initiatives, including the Clinton Health Access Initiative, which is helping five million people living with HIV/AIDS to access life-saving drugs. The Clinton Climate Initiative, the Clinton Development Initiative and the Clinton Giustra Enterprise Partnership are applying a business-oriented approach to fight climate change worldwide and to promote sustainable economic growth in Africa and Latin America.

In the U.S., the Foundation is working to combat the alarming rise in childhood obesity and preventable disease through the Alliance for a Healthier Generation and the Clinton Health Matters Initiative. Established in 2005, the Clinton Global Initiative brings together global leaders to devise and implement innovative solutions to some of the world’s most pressing issues. So far, nearly 2,300 Clinton Global Initiative commitments have improved the lives of more than 400 million people in 180 nations.

In addition to his Foundation work, President Clinton joined with former President George H. W. Bush three times – after the 2004 tsunami in South Asia, Hurricane Katrina in 2005 and Hurricane Ike in 2008 – and with President George W. Bush in Haiti in the aftermath of the 2010 earthquake. Today, the Clinton Foundation supports economic growth, job creation and sustainability in Haiti.

Pomerantz and The Corporate Governance Institute, Inc. look forward to hearing President Clinton’s remarks as he shares his perspectives and experiences with the audience. Additional speakers, all specialists within their field, will address topics such as the latest governance developments, forced arbitration, ESG and governance developments in 2020 and board diversity.

At the conclusion of the educational portion of the day, guests are invited to attend a private dinner at the world renowned Greek restaurant, Avra, located in the heart of Beverly Hills.

Jennifer Pafiti, Partner and Head of Client Services at Pomerantz, has been involved in organizing a number of these Roundtable Events over the past few years, and comments: “These events bring together peers to discuss current issues that directly affect the asset value of the funds they represent. More importantly, though, this setting allows experts within their field to share ideas, opinions and best practices under an important theme, which this year is: The Collective Power to Make Change.” We look forward to welcoming you and President Bill Clinton on June 16, 2020 in Beverly Hills, California.

As seating is limited, kindly reserve your place by emailing: pomerantzroundtable2020@pomlaw.com. For additional questions, please contact Jennifer Pafiti at: jpafiti@pomlaw.com

The Supremes And Congress Ponder Disgorgement

ATTORNEY: CARA DAVID
POMERANTZ MONITOR NOVEMBER/DECEMBER 2019

The Kokesh Decision. The Supreme Court’s 2017 decision in Kokesh v. SEC held that SEC actions seeking disgorgement were subject to a five-year statute of limitations. However, the SEC—and investors—might find relief in recent bills now pending before Congress. On the other hand, there is a chance the SEC will lose its ability to seek disgorgement as an equitable remedy entirely unless the securities laws are amended.

With its decision in Kokesh, the Supreme Court left the SEC struggling to collect on long-running frauds. The disgorgement remedy is a powerful one—it forces defendants to cough up ill-gotten gains they obtained by violating the securities laws. While civil penalties are meant to function as both punishment and deterrent, disgorgement in theory functions under the premise that a wrongdoer should not be able to keep the ill-gotten gains from the fraud. In dollar terms, disgorgement awards often dwarf other remedies available to the SEC. The SEC never possessed explicit statutory authority to seek disgorgement, but federal district courts have been allowing them to do it for years on the premise that it was a form of “equitable relief.” The Kokesh decision held that disgorgement constituted a “penalty” for statute of limitations purposes and, therefore, was subject to the five-year statute of limitations that applied to civil fines or other statutory penalties. This prevented the SEC from recovering, according to agency estimates, more than $1.1 billion in proceeds, and hurt retail investors who could no longer hope to share in these disgorged funds.

Despite defense attorneys’ attempts to extend the Supreme Court’s reasoning to other forms of relief, Kokesh has almost universally been held to apply only to disgorgement. Even that has had a profound impact, however, not only by restricting the amount of money that could be recovered by the SEC when it brings a case, but as a deterrent to the SEC pursuing a case when the majority of ill-gotten gains will never be recouped. Indeed, in its year-end report, the SEC Office of the Investor Advocate itself raised “fewer investigations involving aged conduct” as one of the potential impacts of Kokesh. This has repercussions on private class actions, as SEC complaints often help plaintiffs in private actions.

“[A]s I look across the scope of our actions, including most notably Ponzi schemes and affinity frauds, I am troubled by the substantial amount of losses that we may not be able to recover for retail investors…,” SEC Chairman Jay Clayton stated on December 11, 2018 in testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. “Allowing clever fraudsters to keep their ill-gotten gains at the expense of our Main Street investors—particularly those with fewer savings and more to lose—is inconsistent with basic fairness and undermines the confidence that our capital markets are fair, efficient and provide Americans with opportunities for a better future.”

Congress Reacts to Kokesh. Investors and the SEC might be in for some help, though when that help will come, what it will look like, and to what degree it will benefit victims, are still up for debate. In March, Sen. John Kennedy (R-La.) partnered with Sen. Mark Warner (D-Va.) to introduce the Securities Fraud Enforcement and Investor Compensation Act, which would not overturn Kokesh but would grant the SEC more power than it currently has. Their bill would explicitly grant the SEC the authority to seek disgorgement, subject to the same five-year limitations period under Kokesh, but would also allow the SEC to seek restitution for an investor, in the amount of the loss that the investor sustained, subject to a ten-year statute of limitations. Unlike disgorged funds, whose disposition is subject to SEC discretion, restitution directly compensates the defrauded investors.

As that bill remains in committee, members of the House have progressed further. The Investor Protection and Capital Markets Fairness Act, proposed by Reps. Ben McAdams (D-Ut.) and Bill Huizenga (R-Mi.), passed the House Financial Services Committee in September by a bipartisan vote of 49-5. On November 18, it passed a full House vote by a margin of 314-95. This bill would give the SEC fourteen years to seek disgorgement of ill-gotten gains from fraudsters. McAdams’ original draft of the legislation had no statute of limitations, but the fourteen years was included as a compromise with those that believe the SEC should be restrained in their abilities. This bill has been referred to the Senate’s Committee on Banking, Housing, and Urban Affairs, on which both sponsors of the Senate bill sit.

SEC Chairman Clayton has expressed support for the Senate bill but has not publicly commented on the House bill. And many still oppose any extension of the five-year cutoff. For example, the Securities Industry and Financial Markets Association (SIFMA)–the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets–sent a letter to the House Financial Services Committee expressing its opposition to H.R. 4344. The letter, released to the public, read: “SIFMA strongly opposes increasing the limitations period of 5 years to 14 years, particularly where the SEC has historically used disgorgement to punish respondents, rather than recover monies for investors, as the Court found in Kokesh. The Court appropriately curtailed the SEC’s use of disgorgement to a 5-year limitations period in recognition of its historical overreach in wielding it against respondents.”

The issue SIFMA highlights is the same one that appears to have motivated the Supreme Court’s unanimous decision: the purpose of disgorgement. Though penalties and interest can be awarded to victims via a Fair Fund, there is something about disgorgement being premised in equity that almost compels the conclusion that it should be used to restore victims to where they were prior to the fraud. But that is often not how disgorged funds have been used. In the Kokesh decision, Justice Sotomayor, writing on behalf of a unanimous Court, noted that the disgorgement order in that case “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate. … Disgorged profits are paid to the district courts, which have discretion to determine how the money will be distributed. They may distribute the funds to victims, but no statute commands them to do so. … True, disgorgement serves compensatory goals in some cases; however, we have emphasized the fact that sanctions frequently serve more than one purpose.” In this case, disgorgement, according to the Court, was a penalty because it served “retributive or deterrent purposes.”

Some commentators have queried whether Kokesh would have been decided differently if the disgorgement order in that case directed that the recovered funds be distributed entirely to defrauded investors.

Liu Raises the Stakes. The Supreme Court stated in a footnote in Kokesh that it was declining to take a position on “whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” However, several of the justices questioned that authority during oral arguments.

Now they will get a chance to rule on it—on November 1, 2019, the Supreme Court agreed to hear the case Liu v. SEC, which squarely presents the issue of whether the SEC may seek and obtain disgorgement. In that case, the district court had ordered defendants to disgorge approximately $26.7 million and also imposed other monetary penalties. The court of appeals affirmed. The defendants petitioned the Supreme Court to take another look, arguing, among other things, that the treatment of disgorgement as an “equitable remedy” does not survive Kokesh. With Liu, the Supreme Court faces yet another case where the district court order does not specify that the disgorged funds will be returned to victims.

The race is on. With Congress not known for its speed, it’s likely the Supreme Court will rule before any bill becomes law. If it rules for petitioners, the SEC could lose its ability to impose disgorgement as an equitable remedy altogether until Congress acts.

Of note, both of the proposed bills would grant the SEC explicit authority to seek disgorgement, but neither of them requires that monies recovered go to victims. The Senate bill does get closer because the amendment currently in committee in the Senate includes “restitution” in addition to “disgorgement.” Under the restitution section, the SEC “may seek, and any Federal court, or, with respect to a proceeding instituted by the Commission, the Commission, may order restitution to an investor in the amount of the loss that the investor sustained as a result of a violation of that provision by a person that is—(A) registered as, or required to be registered as, a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, or transfer agent; or (B) associated with or, as of the date on which the violation occurs, seeking to become associated with, an entity described in subparagraph (A).” This goes further than prior law but only covers a subdivision of fraudsters and, additionally, it does not mandate the SEC seek restitution. Under the bill, if the agency is proceeding after five years following the unjust enrichment, but before ten years, the agency would seek restitution because it could not seek disgorgement. That seems obvious but does not really get investors all the way there. Perhaps a better bill would require a certain amount of disgorged funds go to investors regardless of when the action is brought. Time will tell whether, as these bills proceed, amendments will alter them in accordance with the concerns the Supreme Court expressed in Kokesh and/or whether the opinion in Liu will alter the process.

Retiring Delaware Chief Justice Issues A Sweeping Manifesto For Corporate Law Reform

ATTORNEY: GUSTAVO F. BRUCKNER
POMERANTZ MONITOR NOVEMBER/DECEMBER 2019

It is not controversial to say that over the last two decades, no jurist has had a greater impact on the state of corporate governance in this country than Chief Justice Leo Strine of the Delaware Supreme Court. After all, Delaware is the state of incorporation for over 50% of all publicly traded corporations in the U.S. and 60% of Fortune 500 companies. Many other states, recognizing the preeminence of Delaware courts in the field of corporate law, have looked to Delaware court decisions for guidance on resolving open corporate law questions in their own jurisdictions. So Delaware court decisions on issues of corporate law have far-reaching ramifications. Chief Justice Strine has spent the last 21 years dispensing just such opinions, the first 16 on Delaware’s Court of Chancery, and since 2014, while leading the state’s highest and only appellate court. Earlier this year, Chief Justice Strine caused a bit of a stir when he announced that he would retire this fall.

Justice Strine’s decisions, bolstered by his vast academic output, have captivated and transformed corporate America. Many of his opinions are considered among the most influential rulings in corporate law. More often than not these decisions have protected corporate boards from investor challenges to their actions.

In 2013, Justice Strine, then Chancellor, set a new, more relaxed standard of review of investor suits challenging controller-led buyouts in the In re MFW Shareholders Litigation. Because the controlling shareholder is in a position to control the actions of the company, in the past such transactions have been reviewed by the courts under the “entire fairness” standard, which puts the burden on the controller to show that the transaction was fair. Chancellor Strine ruled that when a company sells to a controlling party, forcing out minority shareholders, the deal will be subject to a more relaxed business judgment standard of review as long as it is subject to two conditions: that it was negotiated and approved by a special committee of informed independent directors on behalf of the company; and that a majority of the non-controlling stockholders, being fully informed and uncoerced, vote to approve the deal. Virtually every controller-led buyout since then has contained those two conditions, thus making those deals almost impossible to challenge successfully. Most recently, the Chancery Court has extended the application of MFW to non-buyout related controlling party transactions.

Also in 2013, Chancellor Strine ruled in the Boilermakers Local 154 Ret. Fund v. Chevron Corporation case that Delaware companies can adopt forum selection bylaws that require that Delaware be the venue for deciding claims involving the internal affairs of the corporation. This decision further cemented Delaware’s exalted position as the center of corporate jurisprudence and helped limit multijurisdictional litigation.

In 2015, perched firmly as Chief Justice, Justice Strine upheld the lower court decision in Corwin et al. v. KKR Financial Holdings, holding that the more relaxed business judgment rule is the appropriate standard of review for a post-closing damages action when a merger not otherwise subject to the heightened entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. Because MFW had put a chill on pre-closing challenges, most merger challenges were occurring post-closing. This ruling drastically cut back the number of post-closing challenges to corporate mergers and eased the threat of stockholder litigation as a potential cudgel for an improved sale price.

And in a string of appraisal action decisions culminating this past April in Verition Partners Master Fund Ltd. et al. v. Aruba Networks Inc., Chief Justice Strine all but eviscerated the practice of appraisal arbitrage litigation by finding that the negotiated deal price is the best starting point for determining true appraisal value. Appraisal arbitrage is the practice whereby activist investors buy up the shares of a corporation to be acquired by merger in order to assert appraisal rights challenging the price of the deal. The practice is controversial because the appraisal remedy was meant to protect existing stockholders forced to sell their shares in the merger, not financial opportunists who purchased shares at the last minute, hoping for an appraisal windfall.

So, after a career of setting important board protections, it was no small surprise that on the cusp of retirement, Justice Strine has now issued a sweeping proposal for overhauling American capitalism that suggests that corporate boards need to refocus their attention on worker rights.

Among the proposals laid out in his paper, titled “Toward Fair and Sustainable Capitalism,” Justice Strine posits that companies with annual sales over $1 billion should disclose annually how they treat workers and whether they operate in an ethical, sustainable, and environmentally responsible manner. He argues that accounting rules need to be amended so as to treat investments in human capital like other long-term investments and mandates disclosure on human capital investments.

Justice Strine also believes the tax system should be updated to reduce speculation, address climate change, and promote sustainable growth, innovation, and job creation. He would change the holding period for long-term capital gains from one year to five and would impose a modest tax on most financial transactions, transferring the tax revenue to a newly created Infrastructure, Innovation, and Human Capital Trust Fund.

Justice Strine would also prohibit a public company’s political spending without 75% of shareholders’ consent and would reform the union election process by permitting card check elections to make it easier for employees to join unions and collectively bargain over wages.

These proposals, often associated with the left side of the political spectrum, carry significant weight coming from such a prominent and respected jurist who spent much of his career defending corporate boards from exactly such prodding. Only time will tell if Justice Strine’s lasting legacy are the rulings from his seat on the bench or his admonitions as he steps down.