Ninth Circuit Victory for Pomerantz in BOFI Litigation

POMERANTZ MONITOR | NOVEMBER DECEMBER 2020

By Brenda Szydlo

Pomerantz won a major victory for investors when the Ninth Circuit Court of Appeals reversed, in part, the district court’s dismissal of a securities fraud class action against BofI Holding, Inc. (“BofI”), now known as Axos Financial, Inc., on loss causation grounds.

BofI, short for Bank of Internet, operated as the holding company for BofI Federal Bank (the “Bank”), now known as Axos Bank. The Bank provided consumer and business banking products in the United States. Pomerantz is lead counsel in this litigation, in which it is alleged that throughout the Class Period, BofI misled investors by misrepresenting and omitting material information in their public statements, the disclosure of which would have altered the risk profile of their capital. Two glaring examples are that BofI failed to disclose that: it engaged in lending, directly or indirectly, to criminals; and that it was being investigated by a number of agencies, including the Securities and Exchange Commission (“SEC”), Department of Justice, and the Federal Deposit Insurance Corporation.

The complaint identified an article that allegedly revealed the falsity of BofI’s statements immediately prior to a price drop in BofI’s stock price. Because the article admittedly relied on information obtained through a Freedom of Information Act (“FOIA”) request to the SEC, the district court held that the article could not be considered a corrective disclosure of any misrepresentation as it did not reveal any new information to the market.

On Appeal, the Ninth Circuit reversed, in part, finding that plaintiffs adequately satisfied the loss causation pleading burden. The Court held that plaintiffs may rely on a corrective disclosure derived from a FOIA response by plausibly alleging that the FOIA information had not been previously disclosed. Jeremy A. Lieberman, Managing Partner of Pomerantz, stated, “The decision is precedential in that it clarifies that defendants cannot evade loss causation allegations on the basis that information might have been previously available to the public. The alleged undisclosed information needs to be actually disseminated to the public.”

The Ninth Circuit remanded the case to the district court, where Pomerantz will continue to vigorously pursue the claims on behalf of defrauded investors. Pomerantz’s BofI litigation is led by Jeremy A. Lieberman (argued), Emma Gilmore, Brenda Szydlo and Jennifer Banner Sobers. 

Pomerantz Achieves Two Multi-Million Dollar Class Action Settlements

POMERANTZ MONITOR | NOVEMBER DECEMBER 2020

By Eric D. Gottlieb

In significant victories for investors, Pomerantz recently achieved multi-million dollar settlements in two separate securities fraud class actions: (1) a $3.75 million settlement with Ormat Technologies, Inc. (“Ormat”); and (2) a $13.25 million settlement with Blue Apron Holdings, Inc. (“Blue Apron”). Both proposed settlements are pending court approval.

On September 3, 2020, Judge Robert C. Jones, in the U.S. District Court of the District of Nevada, granted preliminary approval of the $3.75 million settlement that Pomerantz, as sole lead counsel, achieved in a securities fraud class action against Ormat and certain of its officers. The final approval hearing is scheduled for January 11, 2021.

Ormat is a vertically integrated geothermal energy company. Its common shares are dual-listed on the New York Stock Exchange (“NYSE”) and the Tel Aviv Stock Exchange (“TASE”). The complaint generally alleged that, during the class period (August 8, 2017 – May 15, 2018, inclusive), the defendants unlawfully inflated Ormat’s stock price and violated the U.S. federal and Israeli securities laws by issuing materially false and misleading financial statements that improperly recorded millions of dollars of deferred tax assets and by making materially false and misleading statements regarding the adequacy of Ormat’s internal controls.

More specifically, our complaint alleged that Ormat improperly recorded millions of dollars of deferred tax assets on its financial statements, thus materially misrepresenting the company’s financial condition to investors and artificially inflating the prices of the company’s publicly traded securities. A deferred tax asset is an asset carried on a company’s balance sheet that may be used to offset taxable income in future years. For a company to realize the benefit of a deferred tax asset, however, it must actually have future income to offset. When a company is unlikely to earn that future income, it cannot carry its deferred tax assets at full value on its financial statements. Specifically, Generally Accepted Accounting Principles (“GAAP”) require that a company offsets the value of its deferred tax assets by recording a “valuation allowance” if it is “more likely than not” that some or all of its deferred tax assets will not be realized. As Ormat told investors, once a valuation allowance is recorded, it can only be released on the basis of “sufficient evidence that we will be able to generate sufficient future taxable income in the U.S.” Moreover, GAAP prohibits companies from “offset[ting] deferred tax liabilities and assets attributable to … different tax jurisdictions.” The complaint alleged that, instead of abiding by these rules during the class period, Ormat improperly released $62 million of its valuation allowance when it had a reasonable basis to release no more than $35.6 million. Thus, during the Class Period, Ormat continued to record and carry deferred tax assets at falsely inflated values. Defendants allegedly had a motive to misstate the company’s financials, in violation of Ormat’s accounting policies and internal controls, because, after Ormat had to book a large deferred tax liability in connection with its plan to repatriate foreign earnings, defendants wanted to offset this bad news, mitigate its impact on the company’s financial statements, and assure investors that the net impact on the company’s tax position would be positive.

The truth concerning Ormat’s financial condition and internal controls was revealed through disclosures on May 11 and May 16, 2018. On May 11, 2018, Ormat disclosed that it had to delay filing its quarterly report for the first quarter of 2018 because the company’s management had identified an error in the company’s financial statement presentation of deferred income tax assets and liabilities affecting the company’s balance sheets in prior reporting periods. Among other things, the company also noted that it was in the process of evaluating the control implications of this error given that it relates to previous material weakness disclosures. On this news, Ormat’s stock price plummeted $3.58 per share, or over 6%, over two consecutive trading days. Then, on May 16, 2018, Ormat announced that the internal control problems were actually so serious that it was forced to restate numerous prior financial statements, including its second, third and fourth quarter 2017 financial statements and its full-year 2017 financial statements. As a result, the company’s stock price fell further, by $0.67 per share.

The settlement was achieved after approximately two years of litigation. Ormat moved to dismiss the action, primarily on the basis that the complaint failed to plead scienter. The Court denied defendants’ motion in its entirety on December 6, 2019. The Court’s opinion was particularly significant because it rejected Ormat’s argument that the complexity of the underlying GAAP rules foreclose a finding of scienter. Moreover, the Court accepted Pomerantz’s argument that the relevant accounting provisions set forth bright-line rules, and a reasonable person could find that Ormat’s alleged impermissible netting of deferred assets across jurisdictions was done to offset the damaging news of repatriation taxes.

In another meaningful victory for investors, Pomerantz, as co-lead counsel, achieved a $13.25 million settlement with Blue Apron, as well as certain of its current and former officers and directors. On November 6, 2020, lead plaintiffs filed a motion in the U.S. District Court of the Eastern District of New York seeking the Court’s preliminary approval of the settlement. Blue Apron is a subscription-based meal-kit delivery service. The action arose from allegations that the company made material misrepresentations and omissions in connection with its June 2017 initial public offering (“IPO”) in violation of Sections 11 and 15 of the Securities Act. More specifically, the complaint alleged, among other things, that the company’s IPO prospectus misleadingly attempted to assure investors that its ambitious growth plans and ability to compete in the increasingly competitive meal-kit delivery service segment, which were tied to its highly-touted new production facility in Linden, New Jersey, remained on track. However, the defendants allegedly failed to disclose that significant delays had already materialized in opening and in ramping up production at the Linden facility, which was hindering the company’s customer retention, product expansion plans, and strategic approach for the remainder of 2017. Less than two months after the IPO, on August 10, 2017, Blue Apron revealed the significant delays it had encountered at its new factory in Linden and their negative impact on the company’s performance and outlook. Following this news, Blue Apron’s share price fell $1.10, to close at almost 50% below the IPO price. Blue Apron’s stock price continued to slide well into November, as the market learned the full extent of Blue Apron’s ongoing production struggles.

The defendants moved to dismiss the complaint, which the Court denied on April 22, 2020. In its opinion, the Court agreed with plaintiffs’ argument that the allegations regarding material, existing delays at the Linden facility rendered portions of Blue Apron’s IPO prospectus misleading and actionable.

The settlement was achieved following the Court’s denial of the defendants’ dismissal motion, while the parties were engaged in early stages of discovery. The proposed settlement resulted in a recovery provided the putative class of investors with as much as 53% of the maximum potential recoverable damages. This is an exceptional result when compared to historical statistics in class action settlements.

Q&A: Kolby Beckham

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2020

Partner and Head of Client Services Jennifer Pafiti spoke with Kolby Beckham, Fire Captain of the Longview Fire Department and Chairman of the Longview Firemen’s Relief and Retirement Fund in Texas, about recovering from COVID-19, serving as a front line responder and the challenges facing public pension funds.

Jennifer Pafiti: Can you share your experience with having and recovering from COVID-19?

Kolby Beckham: For me, it was flu-like in the sense that I did not have severe symptoms like some do. I’ve been tracking the symptoms of the people in my fire department, and there’s no consistent result. Some have severe gastrointestinal issues, others have none. The common symptom for about 75% of our people is loss of smell and taste. In our community, we’ve had deaths associated with COVID-19, but it’s hard to put your finger on what makes one person an extreme case and another test positive and only be sick for a day and a half.

JP: How has the coronavirus pandemic affected your work on the front lines as a first responder?

KB: It has had a severe impact. We wear respirators with the canisters on the side on every call, and that’s fatiguing, on top of the 107-degree heat index out here. Of course, we’ve shut down all our proactive building inspections, pre-fire plans and station tours. We normally do Fire Prevention Month in October where we go speak to kids in schools and none of that will be happening this year.

JP: As Chairman of the Longview Firemen’s Relief & Retirement Fund since 2008, has this pandemic been the most challenging thing you have faced in that role over those 12 years?

KB: I wouldn’t say COVID-19 specifically has been the most challenging. I came in right before the housing market bubble popped in 2008, so that was our first downturn. That was one of the most challenging times and it was a long span. We’ve been working hard to fix our unfunded liability issues, negotiating with our governing entity here in Texas, the Pension Review Board, and with the plan members, in regard to making benefit changes to get costs down, and that has probably been the biggest challenge. Obviously, the pandemic is creating havoc in the markets. It certainly is another bump along the road, which is pretty much the norm for pension funds, waiting for the next natural disaster or major event that will affect the market.

JP: Can you speak to your work with the TLFFRA Non-Profit Education Foundation?

KB: TLFFRA, the Texas Local Fire Fighter’s Retirement Act, is the legislative act that allows certain pension funds to exist in the state of Texas. Your big pension funds like Dallas Police and Fire, Houston Police and Houston Fire are all large enough to have their own legislative acts enabling them to be pension funds. TLFFRA was enacted in 1938 to enable smaller fire departments to have funds too. Forty-two fire departments in Texas fall under TLFFRA. Smaller funds are unique in how we operate and how the administration is structured, so when we go to general fund conferences, the information is not as applicable to the training that we need for the resources that we have. So we came up with our own conferences and our own training, figuring who better than ourselves to share the wisdom of “we made this decision and it was terrible, and you shouldn’t do the same.” To share our knowledge, we started the TLFFRA Education Foundation, typically hosting two events a year. The first one is peer review training specifically for new trustees to a board, taught 100% by trustees of other pension funds. The second is a larger event where we bring in financial consultants, money managers and securities litigation lawyers to speak to the members about larger issues than just the day-to-day operations. At this time, we’re doing all our pension meetings virtually but it’s tough enough to talk to 10 people online, much less get a couple of hundred people together, so that is something that we are struggling with.

JP: How actively interested are rank and file members with the business of the fund?

KB: Our seven-member board includes three firefighters like me — I work on a ladder truck but I also serve as Chairman of the Board — along with representatives of the city and two citizen board members who represent the taxpayers who give money to the city that gives money to us. It’s in our own best interest to have a healthy pension fund because one day we hope to be on the receiving end of those benefits, so we have to make sure that the fund is being properly taken care of. There are some hard decisions to make, like asking the guys to either contribute more money now or take less money when they retire. Sometimes you’re not very popular in the fire department. We’ve been fortunate in Longview to have interested people that we take with us to conferences to learn about managing the fund before they actually get on the board. I know that some other cities struggle in getting these positions filled. It’s hard to get people to volunteer their time to such a cumbersome position.

JP: What do you see as the biggest issue facing public pension funds today or in the near future?

KB: Pension funds generally fall under the defined benefit plan versus the defined contribution plan. We’ve already seen in the private sector that most defined benefit plans have been done away with, even though the whole design of a defined benefit plan is that it’s meant to go on forever. Unfortunately, it’s very expensive to just say “alright, we’re not going to do this anymore — tomorrow, everybody’s going to get a 401k instead,” because there are still pension liabilities that need to be met. The challenge is getting our funding ratios where they need to be in order to fulfill promises that were made. The reality is, when you work in the public sector, you don’t make the income that someone in the private sector can make in a similar position, but oftentimes, we take the lower pay in exchange for benefits like a pension plan. But what we pay into our pension plan doesn’t just fund our own benefits, it supports ongoing past pensions that were never funded properly before we even worked for the city. And that has been really difficult to make up. I’m at a point that I’m asking my members to pay for their benefits, which they are, and also to take a cut to pay for the benefits of someone that didn’t pay what they should have been paying in the past or for whom the city didn’t contribute what they should have contributed back then. It’s a difficult road ahead to educate people because they see the unfunded costs starting to grow. And unfortunately, it’s a perpetual machine — the longer it doesn’t get paid, the bigger it grows.

JP: What is your strategy when it comes to pursuing actions or claims in response to fund losses?

KB: It’s important that, as a board member, I am making sound investments. But if the fund loses money due to alleged fraud, I think I’m obligated by statute to try to recoup that money because it isn’t my money, it is the retirement money of 385 different people. I’m elected to oversee the fund and make sure it’s in the proper position. If I can use securities litigations to recoup even a percentage of the money lost, I feel it’s 100% worth it. Funds should be proactive. We can’t afford not to seek all revenues that are coming back. Every penny that we can claw back is a penny that rightfully belongs back in the fund.

The Supreme Court Claws Back SEC Clawback Authority

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2020

By Cara David

Investors breathed at least a partial sigh of relief on June 22, 2020 when the Supreme Court handed down its decision in Liu v. SEC. Some feared the Supreme Court might rule the SEC was unable to obtain disgorgement, but those fears were not realized. The Supreme Court instead struck a middle ground, accepting the SEC’s ability to obtain disgorgement but curtailing its use.

As I reported in the Monitor in November 2019, the disgorgement remedy is a powerful one—it forces defendants to cough up 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.

Liu was the first time the Supreme Court tackled the SEC’s use of disgorgement since the Court’s 2017 decision in Kokesh v. SEC. The SEC never possessed explicit statutory authority to seek disgorgement, but federal 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 a five-year statute of limitations. In that decision, the court explicitly withheld decision on “whether courts possess authority to order disgorgement in SEC enforcement proceedings[.]”

The Liu case was fairly straightforward. Defendants/petitioners Charles Liu and wife Xin Wang operated an investment fund that solicited investments from foreign nationals seeking to qualify for immigrant visas to the United States by investing in U.S. businesses. Fifty investors paid almost $27 million for construction of a cancer-treatment center in California. Liu sent a private offering memorandum to prospective investors, pledging that amounts collected from a small administrative fee would fund “legal, accounting and administration expenses” and the bulk of the money contributed would be used to fund construction of the center.

However, an SEC investigation uncovered that almost $20 million of the funds collected went to alleged marketing expenses and salaries, with a large chunk of that ending up in personal accounts and another company under Wang’s control. In the lower court, the SEC was granted summary judgment with the couple being held jointly and severally liable for approximately $8.2 million in civil penalties and approximately $26.7 million in disgorgement. The district court did not allow defendants to deduct expenses incurred on the center and did not require the SEC to distribute the disgorged funds to investors, thereby allowing the disgorged monies to go into the U.S. Treasury. The Ninth Circuit affirmed.

During oral argument in Kokesh, some of the Supreme Court Justices seemed concerned about whether the disgorged funds were being used to compensate the victims. Therefore, Liu offered a good opportunity for the Court to make its position on disgorgement clear, as the case dealt with a large award that might not end up in investors’ hands. In an 8-1 decision, the Supreme Court vacated the Ninth Circuit decision and remanded the case to the lower court for a reduction in the disgorgement amount.

Before the Supreme Court, defendants argued, inter alia, that the disgorgement award was improper because the SEC did not have statutory authority to seek disgorgement. The Supreme Court held that the SEC could seek disgorgement, but that any award of disgorgement had to be in line with equitable principles. Courts had been granting disgorgement beyond what would be warranted in equity, according to the high Court. Specifically , the Supreme Court held:

• “[C]ourts must deduct legitimate expenses before ordering disgorgement” in SEC enforcement actions. In other words, if defendants spent money on anything with “value independent of fueling a fraudulent scheme,” those funds cannot be disgorged. Only fraudulent net proceeds can be disgorged.

• Disgorgement must be “appropriate or necessary for the benefit of investors.” The Supreme Court left as an “open question” whether disgorged funds could ever go into the U.S. Treasury instead of being distributed to investors, but certainly expressed that disgorged funds should go to harmed investors whenever possible. This is because, according to the Supreme Court, the disgorgement award “must do more than simply benefit the public at large by depriving a wrongdoer of ill-gotten gains.” Equity requires it be used to repay investors.

• Imposing joint-and-several liability when ordering disgorgement is not generally in line with equity which imposes “individual liability for wrongful profits.” The exception would be if the defendants were partners in “concerted wrongdoing,” i.e. partners in crime. (In the Liu case, where defendants were married and were both accused of wrongdoing, the lower court is left to determine whether each defendant was subject to individual liability or they were true partners in the fraudulent endeavor.)

Interestingly, while Justice Thomas drafted a strong dissent, he also believed the Ninth Circuit decision should not be affirmed. He wrote that the SEC is not entitled to seek disgorgement because it is not an “equitable remedy.” He therefore was in favor of reversing the Ninth Circuit decision, instead of vacating it and remanding the case.

The long-term implications of the Liu decision are not yet known. But it will certainly have an impact on the SEC and implications for other federal agency enforcement actions brought in federal court, including those brought by the Federal Trade Commission (FTC).

In terms of what the SEC will do in the future, there are several open questions which will impact investors. Some suspect that the SEC will now try to bring more actions as administrative proceedings. It is unclear what impact this ruling will have in those proceedings. In his dissent, Justice Thomas noted a fear that Liu would in fact “cause confusion in administrative practice,” and that the result may be that “disgorgement has one meaning when the SEC goes to district court and another when it proceeds in house.”

However, undoubtedly, there will continue to be many federal court cases brought by the SEC, and the Supreme Court’s decision that disgorgement must “not exceed a wrongdoer’s net profit” will limit future awards. Liu will also create new disputes within cases, including what expenses are considered “legitimate” such that they must be deducted from monies raised as a result of the fraud.

Additionally, the focus on individual liability raises many questions, but will inevitably decrease the amount of money collected over the course of years (if not in every individual case) because it reduces the number of people the SEC can look to for money. Based on Liu, for example, it is now unclear whether the SEC can continue with its practice of requiring tippers to disgorge trading profits earned by tippees.

One possible result of Liu may be the SEC relying more heavily on statutorily-authorized monetary penalties. These funds often go to the Treasury, though they can be, and sometimes are, distributed to defrauded investors.

Of course, defendants will now use these limitations as leverage in negotiations with the SEC to try to bring down settlement awards. It will be interesting to see in future years just how much this impacts the amounts the SEC is able to collect, both in court and as a product of behind-the-scenes negotiations.

And, while Liu and Kokesh are currently the disgorgement law of the land, Congress could still step in and explicitly grant the SEC the power to seek disgorgement. Two bills in the Senate (one of which has passed the House) would do just that. There has been no action on either since last year, but Liu could very well reignite discussions about congressional action. However, given the more pressing issues the Senate must deal with when it returns to session in September, it seems unlikely disgorgement will take center stage anytime in 2020.

Pleading Alternative Consumer Remedies in The Ninth Circuit

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2020

By Jordan L. Lurie and Ari Y. Basser

Pomerantz’s Strategic Consumer Litigation Practice is prosecuting a series of consumer cases that seek to redress a widespread, but little known, abuse in the automotive industry: manufacturers are providing deficient warranty coverage under California emissions warranty law. Car manufacturers fail to identify all of the vehicle parts that should properly be classified as “emissions parts” and “high-priced warranted parts” and covered for extended warranty periods as required by California regulations. Instead, manufacturers omit some parts from their lists of emissions-related and high-priced warranted parts in their warranty books and in submissions to California regulators, in order to reduce the money that they have to pay out in warranty claims.

Consumer actions, brought under California consumer protection statutes, seek both damages for out-of-pocket costs already incurred and equitable remedies in the form of restitution and injunctive relief to compel the car companies to properly identify and cover all high-priced emissions parts under warranty in the future.

Two recent Ninth Circuit cases, Sonner v. Premier Nutrition Corp., 962 F. 3d 1072 (9th Cir. 2020) and Moore v. Mars Petcare US, Inc., 2020 U.S. App. LEXIS 23747 (9th Cir. 2020) (decided a week after Sonner by a different panel of the Ninth Circuit), appear on their face to reach contradictory conclusions regarding the ability of consumers to seek both monetary damages and equitable relief in the same action. The better rule, and the one that Pomerantz has advocated in its consumer cases to reconcile the two opinions, is that before any discovery has been conducted and before a plaintiff can make an informed determination as to whether, in fact, she lacks an alternative legal remedy based on a full development of the record, a plaintiff can plead equitable relief in the alternative. The proper time to elect a remedy is at the end of a case, not the very beginning. We believe that this is the conclusion compelled by the Ninth Circuit’s opinion in Moore, which directly addressed the pleading standard, as opposed to Sonner, which was decided after summary judgement and before trial in a unique procedural context.

Intra-Circuit Split

Prior to the Ninth Circuit’s recent pronouncements, district courts in the Ninth Circuit had been split as to whether plaintiffs alleging state claims providing an adequate remedy at law (such as damages available under the Consumers Legal Remedies Act, the “CLRA”) were barred from also pursuing claims for equitable relief (such as claims under California’s Unfair Competition Law, the “UCL”), unless plaintiffs could first show that damages were inadequate. Courts that disallowed the competing claims reasoned that, because a plaintiff may only seek equitable relief under California’s UCL where she has no adequate remedy at law, if the plaintiff’s other claims provide adequate remedies at law, the UCL claim fails, especially if both claims are based on the same underlying facts.

Courts that have upheld both CLRA and UCL claims reasoned that the appropriate form of relief is not to be decided upon a motion to dismiss and that Rule 8 of the Federal Rules of Civil Procedure expressly allows for pleading in the alternative. These courts also noted that the time to sort out alternatively pled remedial requests is at the end of a case, not at the pleading stage. Once a plaintiff ultimately prevails on her claims, she will still need to show that equitable relief is the only way to remedy a specific type of injury suffered by herself or members of the class, because discovery may reveal that plaintiff’s claims providing legal remedies are inadequate for any number of reasons, despite the fact that her allegations appear adequate. Further, dismissal of the UCL claim at the pleading stage would not save defendant or the Court substantial resources: if the UCL claim is truly identical to plaintiff’s other claims, retention of the UCL claim at the pleading stage would cause only incidental discovery burdens on defendant beyond what would already be necessary to litigate those claims that provide legal remedies.

Interpreting Sonner and Moore

The Ninth Circuit seemed to resolve this intra-circuit split in Sonner. In Sonner, the Ninth Circuit held that before awarding equitable relief under the UCL, a federal court must find that plaintiff lacks an adequate remedy at law. However, Sonner was predicated on a very unusual set of facts in which the plaintiff dismissed her CLRA claim on the eve of trial and elected to proceed only with her UCL claim which provided for a bench trial, in order to avoid a jury trial. The Ninth Circuit excoriated plaintiff’s “gamesmanship” in seeking to deny defendant the constitutional right to trial by jury. Further, in Sonner, the Ninth Circuit determined to not follow state law authorizing equitable remedies and instead applied federal equitable principles, including the requirement that the party pursuing equitable relief establish that it lacks an adequate legal remedy.

Notably, the Sonner Court’s reasoning raises serious issues regarding federalism and the well-settled rule that when forum state law defines the underlying substantive right, state law governs the availability of equitable remedies. These issues likely will be addressed on appeal.

The defense bar has been quick to rely on Sonner to challenge consumer claims seeking both damages and equitable relief, but their rejoicing appears to be premature. Sonner was decided after class certification and summary judgment and immediately before trial. Therefore, Sonner left open the issue of whether plaintiff could legitimately allege alternative remedies at the pleading stage. In Moore, the Ninth Circuit addressed that issue, ruling that “Defendants’ argument that Plaintiffs cannot seek equitable relief under the UCL or FAL, given an adequate legal remedy under the CLRA, is foreclosed by statute. The UCL, FAL and CLRA explicitly provide that remedies under each act are cumulative to each other.”

Thus, Moore would appear to expressly confirm the position taken to date by Pomerantz, that plaintiffs can pursue equitable claims in the alternative to legal claims, at least at the pleading stage. Further, even if it might be proper to dismiss some kinds of equitable claims based on Sonner, there should be no automatic presumption that the existence of legal remedies precludes all forms of equitable relief. For example, a request for prospective injunctive relief is not necessarily foreclosed by the adequacy of damages as a remedy. However, courts that are inclined to dismiss consumer claims for all forms of equitable relief are likely to interpret Sonner as confirming the general rule that a plaintiff must establish that she lacks an adequate remedy at law before securing any form of equitable relief for harm under the UCL and CLRA, even at the earliest procedural stages of the action.

Pomerantz Achieves $18 Million Settlement in Quorum Health Litigation

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2020

By Michael J. Wernke

In a significant victory for investors, Pomerantz, as counsel for the class, achieved an $18 million settlement in a securities fraud class action against Quorum Health Corporation (“Quorum”) and Community Health Systems, Inc. (“CHS”), as well as certain current and former officers of the two companies. Chief Judge Waverly D. Crenshaw, Jr. in the U.S. District Court of the Middle District of Tennessee granted preliminary approval of the settlement on July 27, 2020 and set the final approval hearing for November 30, 2020.

CHS is one of the nation’s largest operators of hospitals. Quorum, an operator and manager of hospitals, was created when CHS spun off 38 of its hospitals on April 29, 2016 into a new stand-alone company. Pomerantz brought the action on behalf of investors in Quorum that acquired Quorum shares following the spin-off. The complaint alleged that Quorum, CHS and the officers violated Section 10(b) of the Securities Exchange Act as well as Section 20(a), the “control person” provision, by issuing financial statements for Quorum that misrepresented its financial condition.

Specifically, our complaint alleged that the defendants misled investors as to the financial condition and prospects of Quorum as a stand-alone company by overstating Quorum’s goodwill. Goodwill is an intangible asset that arises when one company purchases another for a premium value. The value of a company’s brand name, customer base and good customer relations are examples of goodwill. When a company like CHS purchases hospitals like those that came to make up Quorum, it must record the amount it paid for those hospitals in excess of the fair value of the hospitals’ assets as goodwill, and then must periodically test the goodwill, recording an “impairment” to the goodwill when it is more likely than not that the carrying amount of goodwill exceeds its fair value.

In addition to being required to test the goodwill for impairment annually, a company must also test it whenever “triggering events” suggest that the expected future cash flows of the asset have significantly declined. The complaint alleged that the defendants knowingly inflated Quorum’s goodwill and failed to take a necessary impairment to enable CHS to get rid of its worst performing hospitals at an inflated price. As part of the spin-off, the defendants caused Quorum to take on $1.2 billion in debt, which was immediately paid to CHS as a “special dividend” for the assets of Quorum. As a result of the defendants’ false statements about Quorum’s goodwill, investors that acquired Quorum stock following the spin-off paid an inflated price.

The truth concerning Quorum’s financial condition and prospects was revealed shortly after the spin-off (and after CHS received its $1.2 billion) when, on August 10, 2016, Quorum reported its financial results for the second quarter of 2016, announcing that after only two months of operations as a stand-alone company, it was recording a massive $200 million impairment to goodwill. As a result, Quorum’s stock price plummeted $4.99, or almost 50%, damaging investors.

The settlement was achieved after approximately three years of hard-fought litigation. The defendants moved to dismiss the complaint, which the court denied in April 2018. The court’s opinion was particularly significant because it held that the CHS defendants, in addition to the Quorum defendants, were “makers” of the false statements of goodwill in Quorum’s initial financial statements even though the SEC filings were filed on behalf of only Quorum. Normally, only the company and its officers whose stock the class purchased are liable for false statements under the federal securities laws. Here, that would be Quorum and its officers. However, the court accepted Pomerantz’s argument that CHS and its officers should also be liable for the false statements because Quorum was part of CHS prior to the spin-off and all of Quorum’s financials in the spin-off documents were calculated by CHS employees prior to the spinoff.

In April 2019, Pomerantz secured class certification on behalf of investors and also successfully opposed the defendants’ petition to the Court of Appeals for the Sixth Circuit to reverse the class certification.

Discovery was wide-ranging. It involved analyzing over five hundred thousand pages of documents concerning highly complex issues of finance and accounting. Approximately thirty depositions were conducted (several of which spanned two days) and the parties exchanged reports by seven experts on issues concerning accounting standards, asset valuation and stock price movement.

In early 2020, defendants filed a motion for summary judgment, which Pomerantz opposed. In support of our briefing, we submitted to the court hundreds of documents that were uncovered during discovery, which we argued revealed that, despite their knowledge of Quorum’s poor financial prospects as a stand-alone company, defendants drastically inflated the cash flow model used to secure the financing for the spin-off, utilizing what one employee referred to as “borderline absurd” assumptions for revenue and earnings growth. Documents and testimony revealed that defendants used the same inflated cash flow model to test Quorum’s goodwill for impairment, thereby concealing the existence of the impairment. We also submitted documents uncovered in discovery that we argued demonstrated that days before the spin-off, as defendants were preparing to report the Quorum hospitals’ first quarter 2016 results, defendants manipulated certain expenses in order to inflate Quorum’s financial results and further conceal the company’s dire prospects.

On April 7, 2020, Quorum finally succumbed to debts and filed for Chapter 11 bankruptcy. While the action was automatically stayed as to Quorum pursuant to the Bankruptcy Code, Chief Judge Crenshaw ruled that the class action would continue as to CHS and the officer defendants.

The parties were in the final preparations for the July 10, 2020 trial when Chief Judge Crenshaw held a conference on May 29, 2020, during which he informed the parties that he would be denying defendants’ motion for summary judgment. Defendants agreed to settle the action a few days later.

Pomerantz’s perseverance resulted in a recovery that provides the class of investors with as much as 43% of recoverable damages—an excellent result when compared to historical statistics in class action settlements.

A Tribute to RBG

"Women's rights are an essential part of the overall human rights agenda, trained on the equal dignity and ability to live in freedom all people should enjoy."

Ruth Bader Ginsburg

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2020

We owe a great deal to our notorious RBG.  As co-founder of the ACLU Women’s Rights Project, she fought against sex-role stereotyping, arguing and winning five landmark cases before the Supreme Court during the 1970s. These decisions established the principle of equal treatment in the law for women and men and disposed of numerous laws that treated people differently based on outdated gender stereotypes. Later, as a Supreme Court Justice, RBG wrote strong opinions that fiercely advocated for both gender and racial equality.  

RBG’s story is even more compelling because she faced gender discrimination first-hand in law school and her early career. She struggled with the demands of balancing work and family – a theme that is only too familiar to female attorneys today. As a young law student, she also nursed her husband through a bout with cancer and cared for their young daughter. I suspect RBG did not watch much TV. Instead of allowing these challenges to define and defeat her, RBG set out to redefine the law and cleared a path for future generations of women.

It was a sad irony that I learned of RBG’s passing while putting the final touches on a brief in my firm’s case against Wynn Resorts. The litigation arises from allegations that Wynn’s CEO sexually harassed and assaulted the company’s female employees for years, while senior management stood by and did nothing. The case is a stark reminder that much work lies ahead to protect RBG’s legacy and ensure truly equal treatment in the workplace. To be sure, sexual harassment must be tamped out for good, but also the less obvious forms of discrimination – such as gender pay gaps and implicit bias – are still all too prevalent and need to be eradicated. 

Today, we mourn our beloved RBG.  Tomorrow, we must continue her fight.  

Murielle Steven Walsh

Following are brief tributes to RBG from Pomerantz attorneys and a young staff member now applying to law school.

I had the honor to appear for argument before the Supreme Court in 2007 in Stoneridge Investment Partners, LLC vs. Scientific-Atlanta, Inc. Advocates before the Court are often mere pawns; the Justices state their own views and argue their own positions to the other Justices by  questioning the lawyers. It was clear from the outset that the conservative Justices were hostile to my position. But Justice Ginsburg, in her soft, measured voice, threw me a few softball questions to counter their attack. And when my adversary was on his feet, it was Justice Ginsburg who was really on the offensive, making my points better than I had done. She was formidably impressive -- as comfortable and sophisticated in analysis on a complex business case under the federal securities laws as she was with social and Constitutional matters.

Stanley M. Grossman

“Women belong in all places where decisions are being made.”  Justice Ginsburg tirelessly fought to achieve that noble goal.  Faced with tremendous obstacles, she never capitulated but fought for those rights until her last breath.  Justice Ginsburg inspired little girls and women alike to reach for the stars – and made that dream a reality.   She “righted” many “wrongs.”  Rest in Power, Justice Ginsburg. 

Emma Gilmore

“You can do anything--” a phrase many of us have heard, whether from loving parents or encouraging educators. It’s a phrase that implies no barriers and freedom of choice—limited only by our abilities to dream. But it’s a phrase that historically, for many women, included a large and bolded “EXCEPT.” Not for Ruth Bader Ginsburg. With three strikes against her as a woman, a mother, and a Jew, Justice Ginsburg lived a life where that “EXCEPT” pushed her to heights that others would have deemed unascertainable. Those “strikes” shaped Justice Ginsburg into the legend we all mourn today; they motivated her unfailing pursuit of equality and tireless quest against discrimination of all kinds. From successfully arguing five gender discrimination cases before the Supreme Court in the seventies to issuing landmark decisions against discrimination during decades as a Supreme Court Justice, Justice Ginsburg embodied the biblical phrase, “tzedek tzedek tirdof”—“justice justice you shall pursue,” which hung on the wall of her Supreme Court office. As a Jewish mother and a full-time lawyer— I look in awe at Justice Ginsburg’s trailblazing accomplishments. She is the proof that I, that we all, can turn what others see as deterrents into superpowers, and indeed, do anything.

Tamar A. Weinrib

No other lawyer, writer or legal mind has had as much influence on my legal career as Justice Ginsburg. I attended Rutgers University School of Law—Newark, where she taught from 1963 to 1972. Many of my professors at Rutgers were former students of hers who used her lessons, which shaped me as an attorney. As a law student, I was both a member and co-editor-in-chief of the Women’s Rights Law Reporter, the first law journal to focus exclusively on the field of women’s rights law and for which Justice Ginsburg was its first faculty advisor. From its inception to this day, the WRLR walks the trail blazed by Justice Ginsburg and focuses on developing her insights on gender and the law. I am one of many, many attorneys who would not be where I am today without Justice Ginsburg, and her influence guides every case I read, argument I make and word I write as an attorney.

Brian Calandra

I learned of the name Ruth Bader Ginsburg during my early legal studies. Whilst I found Supreme Court opinions interesting, there was something particularly fascinating when the voice was that of Justice Ginsburg, especially in her dissenting opinions. In a male-dominated profession, Justice Ginsburg was a personal role model, particularly for her courage, her strength, her devotion to justice and her commitment to equality. Her legacy will thankfully live way beyond the generations that were lucky enough to witness her make history. 

Jennifer Pafiti

Stanley M. Grossman Earns Lifetime Achievement Award from the New York Law Journal

POMERANTZ MONITOR | JULY/AUGUST 2020

The New York Law Journal has honored Stanley M. Grossman with a Lifetime Achievement Award. Throughout five decades, Stan built a distinguished legal career fighting on behalf of injured investors. He has litigated landmark cases, shaping the law while recovering well over $1 billion for damaged investors. Within his first year at Pomerantz in 1969, the young Stan appeared before the Supreme Court in Ross v. Bernhard and helped secure the right to a jury trial in derivatives actions for investors. In 1981, Stan served as plaintiff’s lead trial counsel in Gartenberg v. Merrill Lynch, the first case ever tried under the newly enacted Section 36(b) of the Investment Company Act of 1940. The standard for fiduciary duty that he presented, now commonly referred to as “the Gartenberg standard,” was later adopted by the Supreme Court. Stan led the litigation of EBCI v. Goldman Sachs that resulted in the seminal ruling that underwriters of IPOs owe fiduciary duties to investors. In 2008, Stan was back before the Supreme Court, presenting his argument in Stoneridge Investment Partners v. Scientific-Atlanta, one of the most important securities cases in a generation. Over the course of a half century of service to the law, Stan Grossman has left his mark as one of the nation’s most influential and respected securities litigators.

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.