85 Years — A Long History of Setting Precedent

POMERANTZ MONITOR | MARCH APRIL 2021

By The Editors

In celebration of the founding of the Pomerantz Firm 85 years ago, the Monitor will feature a highlight from its history in each issue in 2021.

In the last issue, we began at the beginning, following Abe Pomerantz’s journey from a one-room office to his status as “dean” of the plaintiffs’ bar.

Today, we’re looking at two early Pomerantz cases that set key precedents for investors rights — Ross v. Bernhard and Gartenberg v. Merrill Lynch.

In 1969, Partner William E. Haudek appeared before the Supreme Court in Ross v. Bernhard, litigation which secured the groundbreaking decision that guaranteed injured investors the right to a jury trial in derivative actions. The issue before the court was whether the Seventh Amendment to the Constitution, which provides for the right of trial by jury in cases where the value in controversy exceeds twenty dollars, also applied a right to a jury trial in stockholders’ derivative actions in which the actual damages may not come in a monetary form.

Pomerantz successfully argued that the Seventh Amendment did apply, with Justice Byron White writing the Court’s opinion, that “the right to jury trial attaches to those issues in derivative actions as to which the corporation, if it had been suing in its own right, would have been entitled to a jury.”

Justice White further wrote:

Derivative suits have been described as one kind of ‘true’ class action. We are inclined to agree with the description, at least to the extent it recognizes that the derivative suit and the class action were both ways of allowing parties to be heard in equity who could not speak at law. ... Given the availability in a derivative action of both legal and equitable remedies, we think the Seventh Amendment preserves to the parties in a stockholder’s suit the same right to a jury trial that historically belonged to the corporation and to those against whom the corporation pressed its legal claims.

And so it was ordered by the Supreme Court that shareholders have a right to a jury trial in derivative actions.

Gartenberg v. Merrill Lynch was a major victory for investors that first came disguised in defeat. Yes, Pomerantz lost this case but set important precedent that would be recognized and codified into law by the Supreme Court twenty-nine years later.

In 1981, with Partner Stanley M. Grossman serving as plaintiffs’ lead counsel, Pomerantz brought to trial the first case ever tried under the newly enacted Section 36(b) of the Investment Company Act of 1940, in which the Firm argued for a standard of fiduciary duty owed by investment advisors to mutual funds. Plaintiffs argued that Merrill Lynch had violated its fiduciary duty by levying fees that were disproportionately high based on the services it rendered. In other words, the investment advisors were making “too much money” off their clients.

After a bench trial, U.S. District Judge Milton Pollack ruled for defendants, finding that ‘’The compensation paid is high as a matter of numbers but the payment is lawful relative to the gargantuan size of the fund.’’ On Pomerantz’s argument in the case, Judge Pollack added: “[I] can fairly say, having remained abreast of the law on the factual and legal matters that have been presented, that I know of no case that has been better presented so as to give the Court an opportunity to reach a determination, for which the Court thanks you.”

In 2010, the Supreme Court, in Jones v. Harris Associates, turned back to Stan’s argument to adopt “the Gartenberg standard” as the specific standard for assessing whether mutual fund advisors breach fiduciary duties by charging excessive fees. In drafting the High Court’s unanimous opinion, Justice Samuel A. Alito Jr. wrote “we conclude that Gartenberg was correct in its basic formulation of what §36(b) requires: to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”

And with that, “the Gartenberg standard” became, so to speak, the law of the land.

Protecting Investors in a Globalized World

POMERANTZ MONITOR | JANUARY FEBRUARY 2021

By Jeremy A. Lieberman

European Pensions, Europe’s highly regarded information source for pension decision makers and fiduciaries, has honored Pomerantz with its inaugural 2020 Thought Leadership Award. European Pensions selected Pomerantz as the first recipient of this award in recognition that the Firm “has demonstrated the possibility to make a real, material difference to the pension fund space.”

Here, Pomerantz Managing Partner Jeremy Lieberman reflects on the current landscape of global securities litigation and what it takes to protect investors in a globalized world.

In the last several decades, the landscape of global securities litigation has changed dramatically, both in terms of the remedies available to international investors for losses to their portfolios due to fraud and the appetite of investors outside of the United States to pursue litigation.

Since 1995, more than $95 billion has been recovered in securities class actions litigated in the U.S. on behalf of defrauded investors. With landmark recoveries making international news – $6.1 billion in Worldcom in 2005, $7.2 billion in Enron in 2008 and Pomerantz’s $3 billion 2018 settlement in Petrobras – investors outside of the U.S. began to ask: what does this mean for us?

The different rules regarding class action securities litigation in different jurisdictions complicated the path for shareholders around the world wishing to learn about their rights. Further, there were cultural barriers to overcome. Decades ago, many European institutional investors viewed their litigious American counterparts as too aggressive and preferred not to “dirty their hands” in the same way. They tended to accept not being able to participate in recoveries as mere bad luck. While that was the common wisdom then, modern and sophisticated European institutional investors are increasingly proactive. With so much money on the table, they are seeking solutions not just out of best practice but out of fiduciary duty to obtain recoveries for their funds.

In 2010, the U.S. Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd. barred use of the U.S. federal securities laws to recover losses from investments in foreign-traded securities. This ruling exacerbated the sense of unfairness already felt by investors outside of the U.S. Their rights would not be protected, nor could they recover losses, if they purchased shares in the very same company on a non-U.S. exchange as investors that purchased on a U.S. exchange.

The first test of how to deal with the Morrison hurdle arrived almost before the ink on the decision had time to dry. On April 20, 2010, BP’s Deepwater Horizon oil rig explosion and resulting oil spill devastated countless lives and caused immeasurable economic and environmental damage. It also impacted investors. Within weeks, the price of BP’s ordinary shares and its American Depository Shares (“ADS”) plummeted nearly 50%, driven down by revelations that BP’s prior statements regarding its commitment to safety and its ability and preparedness to deal with a large oil spill were misleading.

Although the U.S. federal securities laws protected purchasers of BP’s ADS, which trade on the New York Stock Exchange, the same was not true for the purchasers of BP’s ordinary shares, which trade on the London Stock Exchange (“LSE”). For investors that purchased BP common stock on the LSE, they seemed to have no legal options in the U.S. courts.

Pomerantz responded by developing a new legal theory, placing it at the vanguard of ground-breaking litigation. Through a series of hard-fought victories, Pomerantz secured the right of its clients, both foreign and domestic, to pursue English common law claims in a U.S. federal court to recover their losses in BP’s London-traded common shares and its ADS. This marked the first time, post-Morrison, that institutional investors had been permitted to pursue foreign claims seeking recovery for foreign-traded securities in a U.S. court. The case has now been resolved, with favorable recovery for LSE investors that otherwise would have recovered nothing under Morrison.

Morrison had further consequences for investors of dual-listed shares – a staple feature of most global portfolios. Dual-listed shares (shares traded on more than one exchange) afford institutional investors the opportunity to execute trades on the venue offering the most favorable trading hours, pricing and liquidity at any given moment. However, under Morrison, purchasers of the same dual- listed stock, traded at the same time and injured by the same fraudulent misrepresentations and omissions, might have very different remedies, depending on which exchange shares were bought. Those that purchased on a U.S. exchange would be able to join together with other similarly situated investors to collectively seek compensation in a U.S. class action. Investors purchasing on a foreign exchange, under Morrison, were generally left only the expensive and daunting option of pursuing claims individually in a foreign court likely to be less familiar with and less favorable to securities fraud litigation than those in the U.S.

Continuing its pursuit of justice for defrauded European investors, in 2019, Pomerantz set historic precedent for investors in the dual-listed shares of Perrigo Co. plc, when a U.S. federal court certified parallel classes of investors that purchased Perrigo shares on both the U.S. and the Tel Aviv Stock Exchange. The ruling was the very first to certify a foreign purchaser class since Morrison. Since then, Pomerantz also successfully achieved certification for parallel classes of investors in a securities class action against Ormat Technologies, Inc., in which the Firm recently achieved a favorable settlement for investors.

In addition to the barriers to recovery for international investors set by Morrison, there have been efforts by the U.S. Chambers of Commerce – a big-business-supporting lobbying group – and the U.S. Congress, to clip the wings of securities class actions. However, they have unwittingly created a monster, spawning new litigations to protect and vindicate investor rights within and beyond the U.S.

Legal counsel must be creative in handling these issues and arriving at solutions that are favorable for international investors. The answer, in some cases, is to bring securities fraud cases in jurisdictions outside of the U.S. Pomerantz is currently representing international clients in international litigations, including, among others, against BRF S.A. (Brazil), Wirecard (Germany), Deutsche Bank AG (Germany), Danske Bank (Denmark) and Tesco PLC (U.K.).

The Delaware Court of Chancery Strikes Back

POMERANTZ MONITOR | JANUARY FEBRUARY 2021

By Daryoush Behbood

Section 220 of the Delaware General Corporation Law is a powerful statute that allows stockholders to inspect suspected wrongdoing at Delaware incorporated public companies. With this statute, Delaware stockholders are given the right to inspect a company’s books and records, which can range anywhere from board meeting minutes to communications with government officials about a pending corporate investigation. Such inspection permits stockholders to make an informed decision and determine whether to engage in litigation or otherwise demand remedial action.

Of course, the inspection right provided by Section 220 is not without limitation, and certain elements must be demonstrated before a court will give a stockholder free access to a company’s internal, and many times highly confidential, documents. When a stockholder seeks inspection for the purpose of investigating corporate wrongdoing, one such element a stockholder must demonstrate is a “credible basis” to suspect possible wrongdoing.

In February 2020, Pomerantz, on behalf of its client, served Gilead Sciences, Inc., a company focused on researching and developing drugs used in the treatment of viruses such as HIV, with a Section 220 books and records demand. According to the demand, Gilead adopted a business model that sought to protect its profits and market share at the expense of the very patients its HIV treatments were supposed to help. In so doing, Gilead allegedly violated state and federal antitrust laws; became the focus of massive antitrust lawsuits; delayed the development of safer HIV drugs to extend the profitability of the company’s existing HIV treatments; and was accused of infringing on the U.S. Government’s patents for HIV treatment regimens. Four other stockholders served similar demands.

Given the expansive accusations pending against Gilead, the stockholders believed that they easily satisfied the “credible basis” standard, which, as the Delaware courts have repeatedly noted, is the “lowest possible burden of proof.” Unfortunately, Gilead refused to produce a single document. Thus, Pomerantz’s client and the four other stockholders filed Section 220 complaints in the Delaware Court of Chancery seeking documents related to the above allegations. In response to the stockholders’ complaints, Gilead (as the Court would later note in its opinion granting the stockholders’ demands) “launch[ed] a number of peripheral attacks designed to chip away at the [stockholders’] proper purposes” and even attempted to argue that each of the five stockholders was merely serving as a passive conduit in a purely lawyer-driven inspection effort.

The entire purpose of a Section 220 books and records demand is for the stockholder to determine whether any case exists for the stockholder to pursue. In other words, determine whether any wrongdoing actually exists in the first place. In that vein, the Delaware Court of Chancery has made clear that Section 220 court proceedings are intended to be “streamlined, summary proceedings.” They are supposed to move swiftly and be “promptly tried.”

In its opinion released this past November 2020, the Delaware Court of Chancery noted that Gilead’s defense strategy frustrated that purpose and ordered Gilead to provide the stockholders with many of the corporate internal documents they requested earlier in the year. Unfortunately, many Delaware stockholders (like the Gilead stockholders) seeking to inspect a corporation’s books and records have had to endure many of the same aggressive, scorched earth, defense tactics that Gilead imposed. The Court took notice, stating that “Gilead’s overly aggressive defense strategies epitomizes a trend” whereby “defendants are increasingly treating Section 220 actions as ‘surrogate proceeding[s] to litigate the possible merits of the suit’ and ‘place obstacles in the plaintiffs’ way to obstruct them from employing it as a quick and easy pre-filing discovery tool.’”

The Court continued, in words that are surely to raise eyebrows in many Delaware boardrooms:

Defendants like Gilead adopt this strategy with the apparent belief that there is no real downside to doing so, ignoring that this court has the power to shift fees as a tool to deter abusive litigation tactics. Gilead’s approach might call for fee shifting in this case, and the plaintiffs are granted leave to move for their expenses, including attorneys’ fees, incurred in connection with their efforts to obtain books and records.

In so holding, the Court not only found that each of the five stockholders demonstrated a credible basis to suspect potential wrongdoing and established a proper purpose for conducting the Section 220 investigation, but that Gilead’s defense strategy may have involved “bad faith conduct.” As the Court explained, Delaware courts follow the “American Rule.” That is, “each party is generally expected to pay its own attorneys’ fees regardless of the outcome of the litigation.” However, the Court “retains the ability to shift fees for bad faith conduct ‘to deter abusive litigation and protect the integrity of the judicial process.’” The Court held that Gilead’s “overly aggressive litigation strategies by blocking legitimate discovery, misrepresenting the record, and taking positions for no apparent purpose other than obstructing the exercise of plaintiffs’ statutory rights” opened the door for fee shifting, and granted the stockholders leave to move for attorneys’ fees.

The implications of the Court’s striking opinion remain to be seen. But stockholders and their counsel alike surely hope it will have the deterrent effect the Court most assuredly intended.

Q&A: Louise Howard, Interviewed by Jennifer Pafiti

POMERANTZ MONITOR | JANUARY FEBRUARY 2021

By Jennifer Pafiti

Partner and Head of Client Services Jennifer Pafiti interviewed Louise Howard, the Chief Legal Officer for Universities Superannuation Scheme (Ltd). The USS pension scheme manages over £67 billion on behalf of over 400,000 active and retired academic and academic-related staff from universities in the United Kingdom. USS served as a highly engaged and effective lead plaintiff on behalf of the class in the historic Petrobras settlement, helping achieve a $3 billion recovery for defrauded investors.

Jennifer Pafiti: Please share a little bit about your journey and what led you to your role today at USS.

Louise Howard: I began my professional life as a pensions lawyer. On qualification, it was a toss-up between property finance or pensions and, in the fool-hardiness of youth, I choose the most difficult of the two “so that I’ll never get bored.” I couldn’t have appreciated quite how right that prediction would be! In all my 16 years in private practice, I genuinely do not think I was ever asked the same question twice, and so every new request was a complete greenfield. As for my move to USS, like most good things, it came by chance. Around 2003, “Fiduciary Management” was a rapidly growing new business area being marketed to UK defined benefit pension funds. I found several of my clients approached with differing levels of information about what the trustees of these funds were actually buying into. So that trustees could make informed decisions, I became active on the conference circuit, speaking about how particular fiduciary management models may impact their legal duties. That led to me being approached for the newly created role at USS. I’ll always remember the call as I was on the beach with my young daughter, who had just been stung by a wasp moments before, so when I answered, I think I was probably the most “no-nonsense” version of me!

It was a fantastic opportunity as, even though USS had been established in 1974, it had not had any internal legal support at all until the end of the noughties, and that was then just focused on investment management activity. From 2014 onwards, there was a move to strengthen the control environment in general and broaden the internal legal support to the pensions business in particular. We now have a 15-strong legal team that covers everything from in- vestment legal work to pension fund administration, commercial and contractual work to employment and data protection law. And the rest is history ...

JP: Can you take us to the Car Wash?

LH: The Car Wash is so-called because it was inspired by the car valet business inside my local shopping mall. They have a set of giant posters detailing each of the levels of cleaning you can buy — bronze, silver or gold — each detailing the specific services you would get and, of course, the price you pay for each. I thought to myself that we could categorize the different work we are asked to do, just like the car wash, and then be very clear with our business colleagues what level of engagement they could expect from us. It means we operate transparently and consistently. There are other benefits, of course as well. It can help us plan our resourcing — if the business wants lawyers on more than just a handful of gold standard deals or projects, we will need some extra pairs of hands, or the business might need to prioritize. It’s all very logical, and as such, people can engage with it well, both in the team and in the business.

JP: What is the most important takeaway for institutional investors from the newly revised 2020 U.K. Stewardship Code?

LH: The key takeaway for me is how much further this goes in terms of reach. Asset owners will no longer be able to remain well-meaning but essentially sedentary. The ambit of the Code, now stretching beyond just-listed equities, as well as the granular level of detailed narrative reporting that will be required, represent excellent improvements. But I’d caution that institutional investors should not underestimate the effort that will be involved.

JP: On a related note, what has been the Financial Conduct Authority’s biggest impact on USS?

LH: The Trustee Company’s subsidiary, USS Investment Management Limited, created in 2012, is the entity authorized and regulated by the FCA. It is a special category of firm with a more limited range of permissions than a full scale, multi-client investment manager would have due to having only one client, the Trustee Company. Due to the size of assets under management, USSIM became subject to the new Senior Managers & Certification regime as an “Enhanced Firm.” There are fewer than 1% of firms in that category, and it means that we are subject to the most onerous set of requirements, broadly equivalent to those in force for banks.

A tremendous amount of effort over 12 months went into preparing for the introduction of the new regime, which focusses on senior managers, and a broader population of certification staff, each of whom must be certified as “fit and proper” to perform their role. At the end of that period, we had identified USSIM’s Senior Managers, created a Management Responsibility Map and Statements of Responsibilities, ensuring there were appropriate ‘reasonable steps frameworks’ in place. In addition, we had identified our Certified Persons and prepared for their annual fit and proper assessments and trained all relevant staff on what the regime means for each individual.

JP: Can you speak a little about the effort that goes into the valuation process that the fund is mandated to go through every three years?

LH: It seems a distant memory now, and almost like a fairy tale, but at the start of my career, my work was largely around helping employers access the huge excess reserves that had built up in defined benefits funds as legislation at the time required them to be reduced. Things changed very quickly at the turn of the century, and we started facing deficits in these pension plans. Now UK funds are required by law to undertake a valuation every three years and put in place the contributions revealed by that valuation to be necessary to fund future benefit provision and also fund any deficit concerning historic liabilities. For most plans, this has become an increasingly difficult job, not just because of the inherent uncertainty that comes with trying to price today a benefit that will be paid out many, many years in the future. But we have seen in investment cycles the resulting contribution numbers becoming increasingly painful because of the lack of certainty. The scale of a valuation for a scheme of our size, with close to £70 billion in assets (as of March 2019) and over 400 employers, is immense, and the volume of work and the complexity of the challenges are relentless.

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

LH: It has to be affordability. And I mean for all, sponsors and members. We all still would like the comfort of financial security in the future, but, in my view, with the levels of uncertainty we are facing, that seems an even greater uphill struggle than it has ever in the past. A sobering thought, but we just must keep on doing the best we can for our members.

The Short Squeeze, Stonks and Democracy

POMERANTZ MONITOR | JANUARY FEBRUARY 2021

By The Editors

As this issue of the Monitor goes to press, the stock market continues on a wild ride that began with hedge funds shorting the stock of GameStop, a struggling company whose brick-and-mortar stores sell video games in shopping malls.

To short a stock is to bet that its value will go down. An investor borrows a stock, sells it, and then buys it back to return it to the lender. If the stock is less expensive when the investor sells, the investor profits. Sophisticated investors might identify a flaw in a strong company’s operations before the rest of the market and short its stock, betting that their prescience, once it plays out, will pay big. Noting the flaws in GameStop’s business model, however, did not require much discernment. Expecting customers to travel to strip malls to buy a physical product in the digital age is tilting at windmills; add a pandemic and it becomes a Herculean task. But even though GameStop’s shares were already low when the hedge funds swept in, even a small per share profit, when multiplied exponentially, adds up.

Meanwhile, day traders, transacting in stocks on their cell phones via online, no-fee platforms like Robinhood and E-Trade, were watching the hedge funds watch GameStop. Convening on online message boards such as Reddit’s WallStreetBets, they determined to stick it to the man — namely, the hedge funds — and make some quick money while doing so. Over several months, a large, broad, and loosely cohesive group of day traders devised a strategy for a “short squeeze”: they would buy volumes of GameStop shares to push up its price, and in so doing force the hedge funds to cover their position by rushing to buy back shares, which would further push up the price.

Many of the amateur investors have been placing option bets to bet against the shorts. A call option is a contract that gives the owner the right to buy a specific amount of stock at a specific price by a specific future date. If the price rises, the trader can buy the stock at the set price — now a bargain — and sell it for a profit (or sell the option contract itself). The brokers who sell the options, as a rule, own enough stock to be ready when traders exercise their options. In the GameStop scenario, where the price skyrocketed, those brokers, too, have to buy more stock now to mitigate the burn of having to buy too many expensive shares at one time later. This increases demand, which again increases the price.

The financial flash mob’s plan worked. Shares of GameStop skyrocketed 400% in the last week of January, ending the month with a staggering 1,625% gain. At least one hedge fund, Melvin Capital Management, having lost billions, threw in the towel on its GameStop position. Keith Gill, the 34-year-old suburban father and financial adviser who ignited the GameStop buying frenzy with YouTube videos under the name Roaring Kitty, is now — at least on paper — a multimillionaire.

Meanwhile, a day after GameStop shares rose 135%, Robinhood, the free-trading pioneer purportedly founded to democratize trading, restricted trading on its app in GameStop and other highly shorted securities, only allowing users to close out their positions, while those investors not tied to their app were still free to invest. Robinhood, which is backed by venture capital, said in a statement that these restrictions were made to comply with the regulations that govern it, including capital obligations mandated by the SEC. Indeed, over the last few days in January, Robinhood raised $3.4 billion, most likely to cover heightened margin requirements that may have been imposed by the Depository Trust & Clearing Corporation, the central clearing facility for the stock market.

Day traders staged protests, accusing Robinhood of being in league with the “suits” of Wall Street. The broker’s move also engendered rare bipartisan accord in Congress, with both progressive Democrats and populist Republicans condemning Robinhood. Democratic Senator Elizabeth Warren said:

What’s happening with GameStop is just a reminder of what’s been going on on Wall Street now for years, and years and years. It’s a rigged game. We need a market that is transparent, that is level and open to individual investors. It’s time for the SEC to get off their duffs and do their jobs.

The GameStop story, though, is not simply a tale of Wall Street vs. the Degenerates (as the community on Wall- StreetBets call themselves). Elon Musk, the richest man in the world, fanned the fires with a single-word tweet on January 26 and a hyperlink to WallStreetBets. The word? Gamestonk. Stonks, an intentional misspelling of stocks widely used on Reddit forums, mocks Wall Street’s seriousness, and Musk’s tweet made him an unlikely anti-establishment hero to Redditors.

Some day traders have claimed they bought GameStop for “lolz” — the fun of it. Others jumped in for FOMO once the price started to soar. But many cite having been embittered by the 2008 financial crisis, the subsequent bailout of the big banks, and the failure to hold those responsible accountable.

At the time of writing, it remains to be seen where the GameStop saga will end. Some hedge fund CEOs have had their eyebrows singed, a few day traders got rich, but many analysts predict that those day traders who still have long positions will lose big.

How efficient is a market in which the value of a stock has no relation to a company’s fundamentals? And what can regulators do when an inflated price is not the result of fraud? The SEC now finds itself in the position of seeking potential areas of liability. As Dean Seal wrote in Law360, “The novelty of the situation itself will stand as a test for a regulator in transition — determining what role the SEC has in a seemingly ideological trading war between the mom-and-pop traders it is sworn to protect and the old guard of Wall Street.”

85 Years — A Long Tradition of Innovation

POMERANTZ MONITOR | JANUARY FEBRUARY 2021

By The Editors

In celebration of the founding of the Pomerantz Firm 85 years ago, the Monitor will feature a highlight from its history in each issue in 2021.

Let’s start at the very beginning. In 1926, Abraham Louis Pomerantz, a young graduate of Brooklyn Law School, hung up his shingle in New York City. For years, he shared one small room and a stenographer with three other young lawyers. When one of lawyers had a client visit, the other three would make themselves scarce. But there weren’t many clients in those early days, and the four spent much of their time playing knock rummy.

One day in 1932, Celia Gallin, the widow of Abe’s high school gym teacher, walked in the door. Her husband had left her 20 shares of stock in the National City Bank of New York (today’s Citigroup). Before the market crash of 1929, they had sold for $585 a share; now, in the Great Depression, they traded at $17. Gallin thought there must be someone she could sue to get her money back. Unfortunately, there was not, Abe told her.

A few months later, Ferdinand Pecora took over as Chief Counsel for what had been a bumbling, ineffective Senate probe of the causes of the stock market crash. As Michael Perino, the author of Ferdinand Pecora, the Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance, wrote:

In just a few weeks Pecora turned the investigation around. His first target was City Bank and its Chairman, “Sunshine” Charlie Mitchell. After a whirlwind investigation, Pecora chronicled how Mitchell and the bank’s other executives had manipulated stocks, dodged taxes, ripped off their shareholders, and collected enormous bonuses for peddling shoddy securities to unsuspecting American investors.

Realizing the opportunity that opened up, Abe quickly called Gallin. He still couldn’t get her money back, but he hoped to effect retribution by convincing the court to force the bank’s executives to return their bonuses. Retaining the well-known New York lawyer David Podell to try the case, Abe brought a derivative suit against National City Bank, relying on the disclosures from the Pecora hearings. Abe and Podell won, clawing back $1.8 million in bonuses from the bank’s executives.

A few months later, Pecora held hearings on Chase Manhattan Bank. Abe brought a derivative lawsuit alleging the same wrongdoing Pecora had revealed. The bank settled. Abe thereafter decided to specialize in stockholder suits, and thus began the Firm as we know it.

Again, according to Perino:

In the worst depths of the Great Depression, Pecora paraded a series of elite financiers before the Senate Banking and Currency Committee. The sensational disclosures of financial malfeasance galvanized public opinion for reform and led to passage of the first federal securities laws and the Glass-Steagall Act.

...
Until his death in 1982, Abraham Pomerantz was one of the leaders of the plaintiffs’ bar. He helped pioneer derivative suits brought by small shareholders against publicly traded corporations, and the law firm he founded remains a major player in the field.

In 1946, “on the strength of his familiarity with complicated financial transactions and his reputation as a tenacious trial lawyer,” the United States Government appointed Abe as Deputy Chief Counsel (Economics) at Nuremberg. As such, he was senior trial counsel in all cases against German industrialists for collaborating in Nazi war crimes. He left after eight months, frustrated that the prosecutions were impaired by inadequate human and financial resources. Abby Mann, in his introduction to his screenplay, Judgment at Nuremberg, wrote, “The first time I gave Nuremberg any thought was when I met Abraham Pomerantz at a dinner party in New York in 1957. Pomerantz had been one of the prosecutors in the last trials at Nuremberg when the defendants included diplomats, doctors and Judges.”

In 1965, Variety Magazine, which as a rule covered theater and film, sent reporter Ronald Gold to cover a trial that Abe was litigating. Gold wrote it up as a movie review:

Though he doesn’t get top billing, Abe Pomerantz, playing one of two lawyers for a couple of worried investors, does the standout job. Managing to be both breathless and stentorian, the gray-haired portly veteran delivers a ringing indictment of legalistic trickery, all the while letting the audience know that along with his sincere emotion he’s just as clever as the opposition.

In a 1968 feature in Fortune Magazine titled “Abe Pomerantz is Watching You,” Spencer Klaw opined:

If the past is any guide, at one time or another during the next year the officers or directors of scores of large, publicly held corporations will be handed a depressing legal document. It will inform them that they have been named as defendants in a minority-stockholder suit. The news will be particularly depressing if the plaintiff is represented by Abraham Pomerantz... Pomerantz has been suing corporate insiders for thirty-five years, and in four out of five cases the defendants have had to pay sizable amounts of money out of their own pockets.

Abe was often in the spotlight, as in the lively February 1977 interview segment, “Lancelot at Law,” on Wall Street Week with Louis Rukeyser. On his death in 1982, the New York Times described Abe as “an articulate courtroom orator who reveled in fencing with his political and legal adversaries.”

The late, and esteemed attorney Milton S. Gould eulogized Abe:

The stockholders’ derivative action flourished under the leadership of men like Abe Pomerantz ... and it continues to flourish. I think an enlightened view of its function and usefulness is that the cause of action has proved to be the most effective instrument we have in protecting corporate ownership from misconduct in corporate management. From those cases have evolved useful concepts of fiduciary loyalty and the need for honest full disclosure ... Abe Pomerantz became a hero, and his name became a synonym for the successful prosecution of the plaintiff’s derivative suit.

In 2015, eighty-three years after Celia Gallin first walked into Abe’s office looking for justice, John C. Coffee, Jr., Professor of Law and Director of the Center on Corporate Governance at Columbia University Law School, wrote in Entrepreneurial Litigation: Its Rise, Fall, and Future:

If this book has found one unassailable hero within the plaintiffs’ bar, it was probably Abe Pomerantz.

Are Codes of Conduct Toothless Tigers? A Call for Reform

POMERANTZ MONITOR | NOVEMBER DECEMBER 2020

By Marc I. Gross

In the wake of the Enron debacle, Congress compelled companies to adopt codes of conduct intended to reform corporate governance and thwart recurrence of frauds upon investors. While the Sarbanes-Oxley Act of 2002 focused solely on misconduct by CFOs, the SEC expanded the scope of mandated codes to include all senior executives. The NYSE in turn required codes to be enacted by all listed companies, and the Council of Institutional Investors recommended model codes for a wide range of conduct.

Yet, with too few exceptions, courts have tossed this corporate governance tool into the dustbin, barring investors from recovery for securities fraud upon revelation of executive misconduct in violation of codes despite significant stock price declines. Courts have characterized such codes as mere aspirations, unworthy of reliance - more “puffery” than substance.

Pomerantz urges that this be remedied. Institutional investors should lobby the SEC or Congress to compel senior executives to certify personal and corporate compliance with the codes, just as they are required regarding the accuracy of financial statements and internal controls. This will shortcut the issue of whether codes of conduct are “actionable” statements. In the meantime, courts should otherwise recognize such claims and shift the focus to whether the company acted with scienter in failing to timely disclose material violations.

Examination of court decisions regarding sexual misconduct provides context for this issue.

The Good, the Bad and the Ugly

Sexual misconduct in executive suites may have been de rigeur during the Mad Men era, but is no longer tolerated. More recently, heads have rolled, causing stock prices to plummet with significant investor losses. Perhaps the most notorious recent episode involved McDonald’s, whose CEO Steve Easterbrook was fired in 2019 after admitting to a “consensual relationship” with an employee. Easterbrook nonetheless parted with a $40 million golden parachute. However, after further investigation, McDonald’s discovered that Easterbrook had lied about additional sexual relationships with employees, one of whom received substantial option bonuses. The company is now suing him to “claw back” his severance.

It remains to be seen how the investor lawsuits based on revelations of such misconduct, which are clearly contrary to codes of conduct, will fare. The Second and Ninth Circuit Courts of Appeal have generally upheld dismissal of such cases. Most recently, the CEO of Liberty Tax, Inc. was ousted after abusing his position to “date female employees and franchisees,” taking them “on business trips, ha[ving] sex with them in his office during work hours, and provid[ing] their friends and relatives with positions at Liberty.” When this misconduct was exposed and the company’s stock price fell, shareholders sued, claiming they had been misled by statements regarding the previous work of a compliance task that focused on the company’s internal controls and purported “commitment to ethics,” which had nonetheless failed to disclose investigation of such misconduct, e.g.:

Our compliance task force was very successful in analyzing, reviewing and evaluating the work of our compliance department and taking appropriate action to ensure that the standards of the Liberty brand are upheld and that those who do not uphold Liberty standards are exited from the Liberty system.

In upholding dismissal of this action, the Court of Appeals held that such statements regarding ethical commitments were “inactionable puffery on which no reasonable investor would rely in making investment decisions.”

The Second Circuit’s mauling of code of conduct/ethical behavior-based claims echoes similar outcomes in the Ninth Circuit in Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co. That case arose out of HP CEO Mark Hurd’s dalliance with a public relations employee (a former “adult film” actress) using the firm’s expense account, which led to his ouster and HP’s stock price decline. In dismissing the claims that such misconduct contradicted HP’s Standards of Business Conduct’s (e.g. “we make ethical decisions”), the Court held that:

Defendants made no objectively verifiable statements during the Class Period. As one court has aptly written, a code of conduct is “inherently aspirational.” . . . Such a code expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations.

On the other hand, while the Courts of Appeals have chilled securities fraud cases based on violations of codes of conduct, some district courts have been more receptive. By way of example, in In re Signet Jewelers Ltd. Sec. Litig., Chief Judge Colleen McMahon refused to dismiss claims arising from the company’s widespread pattern of sexual harassment of female employees, including comments on breast size, invitations to hot tubs, and “sexcapades,” revelations of which caused significant stock price declines. Such behavior belied the company’s code of conduct, which represented that it was “committed to a workplace that is free from sexual, racial, or other unlawful harassment”; that “[a]busive, harassing, or other offensive conduct is unacceptable, whether verbal, physical, or visual”; and that adherence to the code, including by senior executives, was of “vital importance.” In denying a motion to dismiss, Judge McMahon held:

While generalized, open-ended or aspirational statements do not give rise to securities fraud (as mere puffery), statements contained in a code of conduct are actionable where they are directly at odds with the conduct alleged in a complaint.

Soon thereafter, the defendants moved again to dismiss, citing the intervening decision by the Second Circuit in Singh v. Cigna Corp. In that case, investors claimed that Cigna’s subsidiary’s Medicare fraud belied the company’s code of conduct, which expressly affirmed the importance of “compliance and integrity, and the “responsibility to act with integrity in all we do, including any and all dealings with government officials.” The Court of Appeals held that such statements were a textbook example of “puffery.”

Following renewal of the motion to dismiss, Judge McMahon held that, given their “context,” Signet’s statements rendered them more reliance-worthy than Cigna’s:

Significantly, Cigna did not rule (as Defendants imply) that all statements in codes of conduct qualify as “puffery.” Rather, the Cigna court expressly stated that “‘context’ bears on materiality.

* * *

Materiality depends upon a number of context- specific factors, including specificity, emphasis, and whether certain statements are designed to distinguish the company in some fashion that is meaningful to the investing public.

In so ruling, Judge McMahon borrowed a page from Judge Rakoff’s decision in In re Petrobras Sec. Litig. which grew out of widespread bribery at the Brazilian oil and gas company (a case in which Pomerantz, as lead counsel, achieved a $3 billion settlement for defrauded investors):

[W]hen (as here alleged) the statements were made repeatedly in an effort to reassure the investing public about the Company’s integrity, a reasonable investor could rely on them as reflective of the true state of affairs at the Company.

The question remains whether the reliance-worthiness of statements regarding ethics and integrity should depend on the precision of the statements. Clearly, sexual harassment and bribery are unethical, and investors should be entitled to presume that corporate executives are not engaging in such misconduct. As such, investors should also be able to bring lawsuits to recover stock price losses caused by disclosure thereof.

Pomerantz leads the securities class action against Wynn Resorts Ltd., its former CEO Steven Wynn, its former General Counsel, and other officers and directors. The case alleges that the defendants recklessly disregarded, or actively covered up, a years-long practice of sexual misconduct by its founder and CEO, Stephen Wynn. The suit was filed in the wake of an explosive Wall Street Journal article published in late January 2018 which detailed dozens of accounts by Wynn employees about this misconduct, which caused the company’s stock price to crash 10% that day, wiping out $2 billion in market capitalization. Although the company initially defended Steve Wynn, he was ultimately forced to resign in early February 2018. Extensive investigations ensued, by both the Nevada Gaming Control Board and Massachusetts Gaming Commission, which confirmed many of the Wall Street Journal article’s accounts and that “settlements” were paid to silence several accusers. Notably, Wynn was found to have paid $7.5 million to a former employee who claimed Wynn had forced her to have sex with him.

The complaint alleges that during the period of the alleged misconduct, the defendants falsely assured investors that the company had a rigorous code of conduct in place that required compliance with legal and ethical norms, and that the company had numerous policies and procedures to guard against sexual harassment and to investigate possible wrongdoing. In fact, the defendants failed to conduct investigations of the numerous complaints described above, in blatant violation of the code. Moreover, as we argued in our brief opposing defendants’ motion to dismiss, these misrepresentations were particularly material in the context of Wynn’s business – because the applicable gaming regulations require their operators to meet “suitability” requirements. If the company harbored “unsuitable” actors such as Steve Wynn, it would be at serious risk of losing its lucrative gaming license, the lifeblood of its business.

Unfortunately, on May 27, 2020, the court granted the defendants’ motion to dismiss, including the code of conduct allegations, finding that such “aspirational” statements were not actionable under the federal securities laws. Pomerantz filed a second amended complaint on July 3, 2020. The Firm is considering its options in the event the court dismisses the case a second time.

Policy and Other Factors Warrant Actionability of Code of Conduct Statements

There are also strong policy reasons why code of conducts should not be deemed mere window dressing by courts. Going as far back as the 1970s, Congress and commentators have recognized the important role that codes of conduct play in setting the tone for corporate culture and “tone at the top.”

Indeed, in the wake of Enron’s allowing its CFO Andrew Fastow to invest in off-balance sheet enterprises (contrary to the company’s stated policy against related party transactions), Congress compelled companies to adopt financial codes of conduct and to disclose when they were waived. In support of regulations implementing these requirements, and expanding them to all senior executives, the SEC stated:

Increase[d] transparency of certain aspects of a company’s corporate governance … should improve the ability of investors to make informed investment and voting decisions. Informed investor decisions generally promote market efficiency and capital formation.

(Emphasis added). As such, Congress and the SEC clearly presumed investors would rely upon such codes when making investment decisions.

Congress’ 1991 adoption of Federal Sentencing Guidelines further supports treating codes of conduct as substantive. Those guidelines provided that if a company is found criminally liable as a result of its employees’ unlawful actions, the company could reduce its penalty by showing that it had established an effective program to prevent and detect violations of law, including a code of conduct. The 2018 edition of the U.S. Sentencing Commission’s Guidelines Manual states that, in deciding whether to reduce corporate punishment, courts should evaluate whether the company has an “effective Compliance and Ethics Program” which entails “promot[ing] an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Further, the Manual states that an organization should take reasonable steps “to ensure that its compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct” and should periodically evaluate the effectiveness of such program as well as provide incentives to “perform in accordance with the compliance and ethics program.”

Empirical studies evidence that investors attribute significant value to a corporation’s reputation for integrity. This is best demonstrated by the price reactions that occur when material violations of codes of conduct are revealed. A recent study by Shiu-Yik Au, Ming Dong, and Andréanne Tremblay, How Much Does Workplace Sexual Harassment Hurt Firm Value? concluded that firms with documented patterns of sexual harassment have experienced annual shareholder value loss of $0.9 to $2.2 billion. “High [sexual harassment] scores are also associated with sharp declines in operating profitability and increases in labor costs. These results indicate that sexual harassment has a highly detrimental effect on firm value.”

In sum, rather than disregarding codes of conduct, courts should recognize their reliance-worthiness. This does not mean that all violations will result in successful claims. Plaintiffs must still prove not only loss causation (i.e., that disclosure of the violations caused significant stock price declines), but also scienter (i.e., that defendants acted in reckless disregard of the code’s statements). Pomerantz also urges institutional investors to lobby corporations, Congress and the SEC to require senior executives to certify, to the best of their knowledge, compliance with such codes. 

Incentive Awards in The Era of Neo-Textualism

POMERANTZ MONITOR | NOVEMBER DECEMBER 2020

By Terrence W. Scudieri, Jr.

A class representative or lead plaintiff who invests time and effort in a case by retaining and monitoring counsel, actively participating in the discovery and settlement processes, and approving settlement offers on behalf and with the consent of a group of similarly-situated individuals, is entitled to a reasonable incentive award as compensation.

Until recently, the principle’s application to federal class actions suits was uncontroversial and unremarkable, even though Rule 23 of the Federal Rules of Civil Procedure does not expressly provide for incentive awards.

But on September 17, a three-judge panel sitting for the U.S. Court of Appeals for the Eleventh Circuit sent shockwaves through the federal plaintiffs’ bar when it held to the contrary. In Johnson v. NPAS Solutions, LLC, the Court held that class representatives “can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he [or she] cannot be paid a salary or be reimbursed for his [or her] personal expenses.” In the Court’s view, “the modern day incentive award for a class representative is roughly analogous to a salary” and thus is not recoverable from the settlement fund. The Court acknowledged that such awards are typically granted in class actions, but reasoned that the practice’s routineness “is a product of inertia and inattention, not adherence to law.” Looking past cases decided in this century and in the last, the Court concluded that Trustees v. Greenough and Central R.R. & Banking Co. v. Pettus, both decided in the 1880s and which have no application to statutory class actions, prohibit incentive awards that compensate class representatives for their time.

The Johnson Court’s reasoning—which harkens to the nineteenth century—wholly ignores the equitable and logistical principles that underlie class action litigation: to permit one member of a group of similarly-situated plaintiffs to stand in the stead of each such plaintiff, to avoid duplicitous litigations and divergent outcomes, and to conserve judicial and financial resources. The Johnson Court likewise failed to engage with the argument that a class representative “serves as a fiduciary to advance and protect the interests of those whom he [or she] purports to represent,” as determined in Kline v. Wolf .

By analogy to the American law of trusts—whose genesis is also from the nineteenth century—a class representative, as a fiduciary (a trustee), should be compensated for offering time and resources to secure a common fund (a trust) for the benefit of the class (beneficiaries). In Barney v. Saunders, the court held, in 1853, that “it is considered just and reasonable that a trustee should receive a fair compensation for his [or her] services; and in most cases it is guaged [sic] by a certain per centage on the amount of the estate.” As Justice Story wrote 102 years ago:

Nor can any one expect any trustee to devote his time and services to a very watchful care of the interests of others when there is no remuneration for his services, and there must often be a positive loss to himself in withdrawing from his own concerns some of his own valuable time. . . . The policy of the law ought to be such as to induce honorable men, without a sacrifice of their private interests, to accept the office, and to take away the temptation to abuse the trust for mere selfish purposes, as the only indemnity for services of an important and anxious character.

The same equitable principle should just as readily apply to class action litigation: where an individual plaintiff undertakes risks and incurs reasonable expenses to create a common fund, on behalf and for the benefit of an entire class of similarly-situated individuals, she acts as a trustee for the whole class and is entitled to reasonable remuneration.

While Johnson establishes a troubling landmark for several reasons, all is not lost for securities class action plaintiffs. Indeed, the Court limited Johnson’s holding, explaining that if “Congress doesn’t like the result we’ve reached, they are free to amend Rule 23 or to provide for incentive awards by statute.” Counsel for securities plaintiffs, taking the Court at its word, will observe that Congress has provided for such incentive awards in the Private Securities Litigation Reform Act (“PSLRA”), which provides:

The share of any final judgment or of any settlement that is awarded to a representative party serving on behalf of a class shall be equal, on a per share basis, to the portion of the final judgment or settlement awarded to all other members of the class. Nothing in this paragraph shall be construed to limit the award of reasonable costs and expenses (including lost wages) directly relating to the representation of the class to any representative party serving on behalf of a class.

By its text, then, the PSLRA expressly contemplates—and approves of—recovery by a securities lead plaintiff or class representative an “award of reasonable costs and expenses” incurred in his or her fiduciary role to the class.

Over the past four years, the federal judiciary has embraced— and likely will continue to adopt—originalist principles when deciding legal and equitable questions, and textualist views when deciding statutory questions. Such a drastic shift in judicial philosophy will doubtless have profound consequences for federal securities litigators and their clients, as longstanding interpretations may well be tested and challenged over the coming decades.

Still, the plain text of the federal securities laws—remedial statutes by their context and purpose—is squarely on the side of our clients, the investing public. This new era presents a challenge, but also an exciting opportunity to present reimagined and innovative arguments on behalf of defrauded investors, and to set new legal precedents that will carry forward Congress’s objectives for the public good. 

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