85 Years - A Wake-Up Call for Boards

POMERANTZ MONITOR | NOVEMBER DECEMBER 2021

By the Editors

In 2013, Russian hackers stole the records of Yahoo’s 3 billion users — including usernames, phone numbers, encrypted passwords and other sensitive information — in what remains, to this day, the largest data breach in U.S. history. In 2014, Russian hackers again compromised the accounts of 500 million Yahoo users. From 2013 through 2015, while Yahoo continued to tout its robust security measures, news of security issues at the company repeatedly surfaced. In 2016, while closing a deal with Verizon, Yahoo finally disclosed the 2014 breach.

Historically, data breach disclosures by publicly traded companies were not generally followed by significant stock price declines, making it difficult to show that investors suffered material harm. With stock prices largely unaffected, cyber-related disclosures, if they engendered any litigation, mainly drove shareholder derivative or consumer protection actions. Data breach securities class actions, when filed, were typically dismissed early on by courts, leaving virtually no precedents.

Pomerantz’s initial investigations revealed a strong indication that Yahoo and its directors had knowingly concealed the company’s deficient security practices and the data breaches of 2013 and 2014. However, the Firm was aware that, given the history of similar litigation, bringing a lawsuit based on such claims was risky. Eager to shape new law, Pomerantz, along with co-counsel, filed a putative securities class action against Yahoo in March 2017.

Jeremy A. Lieberman and Emma Gilmore led Pomerantz’s litigation team. As part of her extensive due diligence, Emma located critical evidence showing that Yahoo’s management had concurrent knowledge of at least one of the data breaches. Importantly, these records showed that Yahoo’s Board of Directors, including Defendant CEO Marissa Mayer, had knowledge of and received repeated updates regarding the breach despite Yahoo denying in its public filings that the CEO knew about the breach. The CEO’s knowledge was a key issue in the case.

The complaint alleged that Yahoo and some of its officers failed to disclose the massive data breaches of 2013 and 2014, as well as two additional data breaches in 2015 and 2016, which affected an additional 32 million Yahoo users. The suit further alleged that defendants knowingly concealed its grossly outdated and substandard information security methods and technologies throughout the class period, while continuing to reassure the public that Yahoo had “physical, electronic, and procedural safeguards that [complied] with federal regulations to protect personal information about [its users],” that it would publicly disclose all security vulnerabilities within 90 days of discovery, and that its data security employed “best practices,” among other misrepresentations.

Beyond the 31 percent decline in share price allegedly suffered by Yahoo’s investors over the course of the class period in reaction to its data breach disclosures, Pomerantz and co-counsel further argued that these data breach disclosures had a substantial and quantifiable financial impact on Yahoo, evidenced when Verizon Communications, Inc. reduced its bid to acquire Yahoo by a whopping $350 million, to $4.4 billion.

After hard-fought litigation, on September 7, 2018, Pomerantz and co-counsel achieved final approval of an $80 million settlement for defrauded Yahoo investors. “While many elements of the Yahoo securities class action may be factually unique,” reported JD Supra’s Carlton Fields and J. Robert MacAneney, “the settlement is a milestone because it is the first significant securities fraud settlement from a cybersecurity breach.”

A month after the class action settlement received preliminary approval from the court, the SEC imposed a $35 million fine on Yahoo in connection with the 2014 data breach, marking the first time a publicly traded company had been fined for a cybersecurity hack. While the SEC acknowledged that large companies are at risk of persistent cyber- related breaches by hackers, it did not excuse companies from reasonably dealing with these risks and of responding to known cyber-breaches. The SEC said that Yahoo continued to mislead investors with generic public disclosures about the risks of cyber-related breaches, when it knew a significant breach had occurred.

Following on the heels of this fine, the SEC updated its guidance on cybersecurity disclosures to stress the importance of cybersecurity policies and procedures and advise companies that they need “disclosure controls and procedures that provide an appropriate method of discerning the impact that such matters may have on the company and its business, financial condition and results of operations.” It also calls for public companies to be more open when disclosing cybersecurity risks, with companies expected “to disclose cybersecurity risks and incidents that are material to investors, including the concomitant financial, legal or reputational consequence.”

Kacy Zurkus, on securityboulevard.com, wrote: Yahoo agreed to settle the securities class action lawsuit to the tune of $80 million, which should serve as a wake-up call for boards. Why? It’s the first of its kind—a milestone shareholder settlement related to a data breach. … [T]here has been little evidence to motivate boards to get started on making real changes—until the Yahoo settlement. The settlement amount—$80 million—is a hefty sum, which makes it much more difficult to ignore the reality that litigation continues to pick up steam.

JD Supra’s Fields and MacAneney presciently concluded at the time that, “Together, the Yahoo proposed settlement and the new SEC guidelines may provide the groundwork that enables plaintiffs’ law firms to bring securities actions to pursue these claims.”

Shareholder Interests Appear to Remain Front and Center in Public Benefit Corporations

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2021

By Brian Calandra

In the wake of the economic downturns following the collapse of the dot-com boom at the turn of the century and the Great Recession of 2008—which were both attributed, in part, to corporate misconduct—legal advocates began exploring alternatives to traditional corporations (“C Corps”) that would prioritize social responsibility and the greater good over short-term profits and share price maximization. These efforts accelerated in 2010, when Maryland became the first state to enact legislation authorizing “public benefit corporations” (“PBCs”). Since then, more than 35 states and the District of Columbia have enacted laws authorizing PBCs, which are for-profit corporations whose boards of directors are required to consider both public benefit and financial performance when making decisions.

While thousands of private PBCs quickly formed in response to these laws, it was not until 2017 that a PBC launched an IPO in the United States. After a short pause, at least nine more PBCs launched IPOs in 2020 and 2021, and, in January 2021, a public C Corp converted to a PBC for the first time. It most likely will not be the last time a C Corp converts to a PBC, as in the past year shareholders of at least 16 public C Corps (including Alphabet, Amazon, Facebook, and Wells Fargo) have submitted proposals to convert those companies to PBCs.

PBCs, and the laws enabling their existence, hope to incentivize socially responsible—or, more precisely, socially cognizant—decision-making by requiring their officers and directors to consider the interests of both the corporation’s shareholders and stakeholders, e.g., employees, customers, members of the community at large, and the environment, over short-term profits.

While these “dual priorities” of PBCs may appear to conflict with, or at the very least diminish, shareholders’ interests, upon closer examination, shareholders’ position at the focal point of corporate activity likely remains undisturbed.

What is a PBC?

Three factors distinguish a PBC from a C Corp. First, the PBC’s corporate purpose stated in its formation documents must include a “social mission.” Second, as described above, PBC directors must consider the impact of the company’s actions on shareholders as well as stakeholders. Third, PBCs must report on their pursuit of their social mission.

Although these elements are generally consistent across PBC statutes, their particulars can vary widely from state to state. For example, while some states require a primary corporate purpose of creating some public benefit, in Delaware, PBCs need only identify public benefits that are among their purposes. In addition, while PBC statutes generally require directors to consider non-shareholder stakeholders when making decisions, these statutes neither identify stakeholders nor assign levels of importance to different types of stakeholders. Finally, some states require PBCs to publicly report on their pursuit of their public benefits while other states only require these reports to be distributed to shareholders.

At its core, incorporating as a PBC ostensibly protects the company’s directors by giving them the flexibility to consider stakeholders without breaching their fiduciary duties to shareholders. For example, a PBC’s board, as opposed to a C Corp’s board, can reject a substantially larger offer from a potential acquirer if the board determines that accepting the offer would undermine the public benefit defined in the PBC’s formation documents. On its face, this act would appear to conflict with shareholders’ interests, since it would seem to be in the shareholders’ interest for any acquisition to occur at the highest possible price. As we will see, however, such an act most likely would be exactly what the PBC’s shareholders wanted the board to do.

Do the Dual Priorities of PBCs Conflict with Shareholders’ Best Interests?

Whether a board has a legal duty to maximize its shareholder value (i.e., a company’s share price) has been and continues to be vigorously debated. Setting aside whether this duty exists, PBCs do not appear to conflict with shareholders’ interests, even if certain actions may not maximize a PBC’s share price.

For example, although a PBC’s directors can consider other stakeholders when making corporate decisions, ultimate corporate authority is still vested squarely with shareholders. If shareholders are unsatisfied with a director’s performance, they have the right to remove that director. Indeed, since the 1990s, rules and regulations have been enacted or revised to make it easier for shareholders to act if they are unsatisfied with a board’s decisions. Rule 14-8 of the Securities and Exchange Act of 1934, which was adopted in 1992, made it easier for shareholders to include their own proposals in proxy statements, and New York Stock Exchange Rule 452, which was enacted in 2010, prohibits brokers from voting in director elections when they have not received instructions from their customers. Since brokers traditionally voted such shares in accordance with current management’s proposals, removing these votes makes it much easier to reject management proposals.

In addition, many PBC statutes expressly provide for “enforcement proceedings” that can be brought when a company fails to pursue its stated public benefit or if the company violates a provision of benefit corporation law. These statutes, however, solely vest the right to bring such enforcement proceedings with shareholders, not the stakeholders.

Further, laws governing PBCs maintain all the rights vested in shareholders of traditional C Corps, including voting on major transactions, inspecting books and records, and filing derivative suits. In short, nothing in the formation of government of a PBC displaces shareholders from their perch atop the corporate hierarchy.

Beyond this undisturbed vesting of authority within shareholders, however, other factors strongly suggest that a PBC will act in its shareholders’ interests. PBCs, which are formed expressly for the purpose of pursuing, and hopefully achieving, some social good, wear their proverbial hearts on their sleeves by enshrining these purposes in their foundational documents and, in the case of publicly traded PBCs, using “Risk Factors” in quarterly and annual reports to expressly warn investors that corporate decision-making may not be based solely on creating profits. Accordingly, an investor in a PBC decides to invest in substantial part because of the PBC’s commitment to a particular social good at the expense of profits, and thus a PBC’s board furthers shareholders’ interests by prioritizing social good over short-term profits or share price.

In addition, a company that incorporates as a PBC should be able to (i) recruit employees who identify with its social mission and who will thus be more productive and loyal, (ii) motivate existing employees who share those values, and (iii) attract business from customers who share those values. Increasing employee productivity and customer loyalty is obviously in shareholders’ best interests because it will make the company’s performance more consistent over the long term.

While these and other arguments show how the PBC form is designed to incentivize corporate conduct consistent with shareholders’ interests, arguments that PBCs conflict with such interests tend to arise from assuming the worst in people—in this case, corporate officers and directors. For example, one common argument expressed by Frank H. Easterbrook and Daniel R. Fischel in The Economic Structure of Corporate Law asserts that officers and directors of a PBC cannot act in shareholders’ best interests because “a manager told to serve two masters (a little for the equity holders, a little for the community) has been freed of both and is answerable to neither.” Another argument asserts that directors and officers will instantly prioritize their own personal interests over shareholders’ and stakeholders’ interests at the first sight of any weakening of their fiduciary duties to shareholders. This is because, the argument goes, there is no effective means to hold the officers and directors legally accountable given that shareholders’ class actions and derivative lawsuits can be batted away by attributing any decision, no matter how irrational, to the pursuit of a vaguely defined social benefit, and stakeholders have no ability to sue under any circumstances.

Conclusion

While it appears that shareholders continue to reign supreme even in PBCs, this new corporate structure has not been around long enough to generate a performance track record or to be tested by proxy battles, derivative lawsuits, and securities fraud class actions. Dueling arguments that they advance or undermine shareholders’ interests are thus only based on theoretical deductions, not hard evidence. Once data on financial performance has accrued and a representative sample of challenges to decision-making have succeeded or failed, it will be time to take stock of whether PBCs are an advance in corporate evolution or a harbinger of doom.

SEC Resets 'Set It and Forget It' 10b5 Plans

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2021

By Jessica N. Dell

On September 9th, the U.S. Securities and Exchange Commission’s (“SEC”) Investor Advisory Committee (“IAC”) adopted new proposed recommendations to overhaul Rule 10b5-1, which the SEC first adopted in 2000 as a framework for insiders of publicly traded corporations to buy and sell securities without running afoul of insider trading laws, compliance rules or the appearance of conflicts of interest, and to set up a trading plan for selling stock they own. Rule 10b5-1 is a clarification of Rule 10b-5, created in 1942 under the Securities and Exchange Act of 1934 in order to explicitly prohibit the use of fraud or deception in connection to the sale or purchase of securities on U.S. exchanges.

Under the terms of Rule 10b5-1, both the seller and the broker making the sales must not have access to any material nonpublic information (“MNPI”). The SEC considers a stock transaction to have been made “on the basis of” MNPI if the trader was “aware” of the MNPI at the time of the transaction. But it also provides an affirmative defense if the transaction was made pursuant to a trading plan that satisfies these conditions: (i) it was adopted in good faith before the insider became aware of MNPI; (ii) it specifies the amount, price, and date of the transactions; (iii) it provides written instructions or a formula that triggers the transactions; and (iv) it does not allow the insider to influence how, when, or whether transactions take place once the plan is established.

Addressing concerns that SEC Chair Gary Gensler first raised in comments to the Wall Street Journal in June, the proposed recommendations seek to “freshen up” Rule 10b5-1, with the goal to reduce the risk that company executives, using private information to opportunistically sell shares of companies they oversee, could invoke this rule as a shield against charges of insider trading. Certain features had “led to real cracks in our insider trading regime,” according to Gensler, and it would be a top priority of the SEC to move quickly to tighten regulations against insider trading.

While the protective trading structure offered to executives under 10b5-1 could continue to meet the intended purpose for good faith transactions, critics pointed to data showing the plans were being used to shield abuse. A 2020 Stanford University study had detailed trends suggestive of abuse, flagging problems with their structure that would continue to frustrate the purpose of these accounts. Calling it a matter of “good corporate hygiene,” the prior SEC Chairman, Jay Clayton, also called for these changes in order to eliminate “any suggestion of impropriety or unfairness.”

Compliance with these plan terms seemed straightforward. To qualify for protection under Rule 10b5-1, executives would enter into a nonbinding contract with a broker third party to execute trades on their behalf and have a “Set it and Forget it” schedule of trades. However, while the expectation was that the executive would rely on Rule 10b5-1 to sell in multiple transactions spread out over time, the reality was starkly different. Because the original rule did not specify a minimum number of transactions, executives could use a newly minted plan for a single trade, as needed. They could have as many plans as they desired to deal on new information and could terminate or modify these at will.

Stanford University’s Rock Center for Corporate Governance, in the aforementioned study, reported that their review of a dataset of over twenty thousand 10b5- 1 plans revealed that “a subset of executives use 10b5- 1 plans to engage in opportunistic, large-scale selling of company shares.” The report described major “red flags ... suggestive of potential abuse” while stating that their findings were also consistent with prior research that suggested “10b5-1 sales systematically precede periods of underperformance and early termination of planned sales systematically precede periods of outperformance.” These trends were suggestive that Rule 10b5-1 plans were being exploited to shield insider trading.

Following Gensler’s directive, a subcommittee of the IAC issued draft recommendations in August. Stating that there was “strong bipartisan support” for revisions to Rule 10b5-1 to “improve transparency regarding insider trades and enable effective investigation and enforcement of violations,” the IAC recommended that the SEC “move quickly to close identified gaps in the current rule.” Among other policy changes, the IAC recommended that insiders or issuers be prevented from having more than one 10b5-1 plan in effect at the same time and would require a cooling-off period from the time of origination or modification.

Under the proposal, executives creating a new 10b5-1 plan or modifying an existing plan would have to endure a “cooling-off” period of at least four months before making trades under the newly adopted or modified plan. The IAC noted that such a cooling-off period would ensure that an insider or issuer could not put in place a plan that trades in the same quarter as its adoption and that limiting the affirmative defense protections to a single plan “would signal to the market that a plan was entered into in good faith.”

The recommended policy also set out additional disclosure requirements including proxy statement disclosure of the number of shares covered under corporate 10b5-1 plans for each executive as well as disclosure (on Form 8K) of the adoption, modification, or cancellation of 10b5-1 plans by an issuer, noting the number of shares covered by such plans. The new rules also extend Form 4 (Statement of Changes in Beneficial Ownership) reporting requirements to all companies – including non-U.S. issuers – with any securities listed on a U.S. exchange.

Approving the IAC’s recommendations in September, Gensler applauded the fast work of the subcommittee, stating “I believe plans under Exchange Act Rule 10b5- 1 have exposed potential gaps in our insider trading enforcement regime…you’ve pointed out some important areas that are in line with what I’ve asked staff to consider in a proposed rulemaking.”

Jennifer Pafiti Honored with 2021 Women, Influence & Power in Law Award

Jennifer Pafiti Honored with 2021 Women, Influence & Power in Law Award Corporate Counsel magazine honored Jennifer Pafiti, Pomerantz’s Partner and Head of Client Services, with a 2021 Women, Influence & Power in Law award for Collaborative Leadership. The awards recognize attorneys — general counsel, in-house leaders and law firm partners — who have “demonstrated a commitment to advancing the empowerment of women in law.” Dedicated to honoring women who champion other women and promote diversity in the legal industry, the WIPL award winners are “business strategists, complex problem-solvers and, of course, great lawyers.”

As a key player in Pomerantz’s litigation against Brazilian oil giant, Petróleo Brasileiro S.A.–Petrobras, Jennifer — along with a litigation team that was 80% female — helped secure a record-breaking $3 billion settlement on behalf of defrauded investors. The culmination of over three years of hard-fought litigation led by Managing Partner Jeremy Lieberman, this significant 2018 victory set records as the largest securities class action settlement in a decade, the largest settlement ever in a class action involving a foreign issuer, and the fifth-largest class action settlement ever achieved in the United States. It is also the largest settlement ever achieved by a foreign lead plaintiff, and the largest class action settlement in history not involving a restatement of financial reports.

Universities Superannuation Scheme (“USS”), the trustee of the UK’s largest private pension scheme as measured by assets, served as lead plaintiff for the class in Petrobras. As an attorney dually qualified to practice law in the US and the UK, Jennifer worked closely with USS throughout the litigation.

While pursuing complex securities fraud litigation, Jennifer also spearheads client development and oversees PomTrack®, a proprietary system for monitoring clients’ assets with state-of-the-art technology and a team of professionals who cross-reference trading data against current and potential securities class action claims.

PomTrack® enables the Firm to alert fiduciaries when assets they oversee suffer significant losses that may be attributable to financial misconduct. Jennifer brought in Pomerantz’s first portfolio monitoring clients from the UK, Germany, and the Netherlands, growing the Firm’s foreign and domestic client base to include some of the most influential institutional investors around the globe. Under her supervision, PomTrack® assets under management have tripled, currently at $6.8 trillion in combined client assets. More than 50% of Jennifer’s PomTrack® team are women and minorities.

Jennifer also leads the Firm’s institutional investor educational initiatives, organizing Pomerantz-sponsored conferences around the world. In 2018, Jennifer organized a Corporate Governance and Securities Litigation conference in New York on the theme of how corporations, law firms, government agencies and pension funds might help women and minorities rise through the ranks and pioneer a path for change and unity in our communities. She is also managing Pomerantz’s upcoming Corporate Governance roundtable, which, after several COVID-related postponements, will take place in California on June 14, 2022, featuring special guest speaker President Bill Clinton.

“There is nothing new about mentoring colleagues while empowering their inclusion and growth in the process,” according to Jennifer. “This has been the status quo for men since time immemorial. What’s new is that public sentiment and the number of women in power in the legal industry have both reached a scale where meaningful gains in equity and inclusion for women will no longer be denied. We owe a responsibility to each other and those who have come before us to help our generation push the tipping point over the edge. This is the moment for women to exert their influence and power.”

Jennifer and her fellow honorees will be recognized at an awards ceremony in October 2021 as part of Corporate Counsel’s Women, Influence & Power in Law Conference in Washington, D.C.

Q&A: Natalie Tuck

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2021

By The Editors

The Monitor recently spoke with Natalie Tuck, Editor of European Pensions, a highly authoritative information source for pension decision makers.

Monitor: What are some of the major hurdles facing European pension schemes today?

Natalie Tuck: The sustainability of pension systems, amid Europe’s ageing population, is a major challenge across the continent. According to data from Eurostat, in 2020 the percentage of those aged over 65 was 20.6%, an increase of 3 percentage points since 2010. This will only increase over the coming years, putting added pressure on public pension systems. Institutions for Occupational Retirement Provision (IORP) schemes are seen as one solution to ease some of that pressure. Defined benefit occupational schemes have their own funding problems, which is why we are seeing a gradual transfer to defined contribution systems in Europe – the Netherlands is in the process of transitioning. However, this passes the burden of sustainability onto individuals, who now need to make sure they save enough for retirement – yet another problem for the industry to solve!

M: What are the current hot topics in regulatory and legislative issues?

NT: Sustainable finance is a key policy area for the European Union and, as a result, it has introduced a package of legislative measures to achieve its objectives. In July this year, the European Commission published its new Sustainable Finance Strategy, which includes several proposals that will impact the pensions industry. For example, it detailed proposals to develop reporting obligations under the Sustainable Finance Disclosure Regulation (SFDR), a regulation that applies to IORPs, to include more reporting on the decarbonization of financial products and social factors. The Commission also proposed changing the prudent person rule under the key pension legislation, the IORP II Directive, to require pension funds to consider participants’ sustainability preferences in investment decisions. In addition, the Commission may make it mandatory for pension schemes to consider the non-financial impact of investment decisions on ESG factors. While the industry is largely supportive of the changes, the industry association, PensionsEurope, is calling for proportionality in the Commission’s approach to IORPs, which greatly vary in size.

M: How does cross-border pension pooling work?

NT: Pension funds have several options when it comes to cross-border pension pooling. They can create their own cross-border IORP scheme, join a cross-border master trust, or companies can pool their pension fund assets through common investment funds. The first two are facilitated through the IORP II Directive introduced in 2016 but have actually been possible since 2003, when the first IORP Directive was introduced. These schemes, which can be defined benefit or defined contribution, must comply with the local social and labor laws, and taxation rules, of the country they are offered in. For example, if a cross-border fund is based in country A (home state), but operates in countries B, C and D, it would be necessary to create specific national compartments complying with the local laws and rules of each country. The latter option of pooling assets through common investment funds, is more of a lite touch option to pension pooling. In this case, companies have the option to invest assets from their pension schemes in different countries alongside each other in a common investment fund. There are several tax transparent vehicles that can be used, such as Ireland’s Common Contractual Fund (CCF) or the Luxembourg domiciled Fonds Common de Placement (FCP), among others.

M: How do European pension funds see litigation as a vehicle for asset recovery after incidents of securities fraud?

NT: European pension funds are increasingly turning to the law as a way to recover assets lost due to securities fraud. Your own Managing Partner, Jeremy Lieberman, recently explained in a podcast with European Pensions, that having watched their US counterparts receive compensation whilst they suffered only losses, European pension funds realized that engaging with companies on this wasn’t working. To quote Jeremy, whilst many European institutional investors “don’t want to put their head above the parapet,” that attitude is now changing, driven by the necessity to recover financial losses. There’s also strength in numbers, and many pension funds are joining class actions and multi-claimant cases, and in some instances, acting as the lead plaintiff.

M: What is the most significant story that you have covered so far on the pension beat?

NT: The introduction of the freedom and choice pension reform in the UK market, which was introduced in April 2015. It was a huge shock to the industry when it was announced by then Chancellor George Osborne in March 2014, as there had been no leaks about it beforehand. The industry was given one year to prepare for the changes, which completely revolutionized the decumulation market in the country. Savers went from, in most cases, having to purchase an annuity upon retirement, to having the freedom to choose between an annuity, drawdown or to take all their cash at once.

M: How do ESG and equity inclusion for women and minorities rank as concerns for European pension funds?

NT: Pension funds in the Nordics lead the way when it comes to ESG considerations, with many now publishing sustainability reports alongside their annual reports detailing the work they do in this area. However, a lot of the focus is on the ‘E’ (environmental) part of ESG and although progress is being made on the equity of women, there is still a long way to go. That being said, I have noticed the issue rising up the agenda, from pension funds pushing for greater female board representation within their investee companies to looking at ways to close the gender pension gap that so often affects their own scheme members.

M: What inspires you most in your work each day?

NT: One of the reasons I became a journalist is because I get to do something different, learn something new and speak to different people every day. As a pensions journalist I’m fortunate to write on a hugely diverse topic; one day I could be covering class actions, or ESG investment topics, and the next I might be writing about diversity or pensions inadequacy. I’m particularly inspired by the passion of those working in the pensions industry, who strive for the best outcomes for pensions scheme members.

M: Arsenal or Manchester United?

NT: Manchester United – hopefully we will be in with a chance now that Cristiano Ronaldo has returned to Old Trafford.

85 Years - Clearing the Air About Discovery

BY THE EDITORS

In Fiat Chrysler, Pomerantz increased the discovery tools available to investors litigating against highly regulated companies

In September 2015, Pomerantz filed a complaint against Fiat Chrysler Automobiles N.V., one of the world’s largest car manufacturers, on behalf of a retail investor. After years of hard-fought litigation, in late 2019, the Firm achieved a $110 million settlement for defrauded investors, representing between 13.75% and 19% of maximum recoverable damages – an exceptionally high percentage for this type of action. In addition to the substantial financial recovery, Pomerantz set important precedent that expanded shareholder rights, while significantly advancing the ability of investors to obtain critically important discovery from regulators that are often at the center of securities actions.

The complaint alleged that defendants misled investors by asserting that the company was complying with regulations for conducting safety recalls set by the National Highway Traffic Safety Administration (“NHTSA”), and with regulations for controlling emissions of Nitrogen Oxide (“NOx”) set by the Environmental Protection Agency (“EPA”) and the European Union. Fiat Chrysler, in fact, had been violating those regulations since 2013 – it purposefully delayed notifying vehicle owners of defects and failed to repair the defects for months or years. More nefariously, the company also installed “defeat device” software in its diesel vehicles, designed to detect when the vehicle was being tested by a regulator such as the EPA. When testing conditions were detected, the vehicle would perform in a compliant manner, limiting emissions of NOx. When testing conditions were not detected, such as during real-world driving conditions, the emissions controls were disabled, and the vehicles would spew illegal and dangerous levels of NOx.

 On July 26, 2015, the NHTSA fined Fiat Chrysler a record-high $105 million and required a substantial number of recalls and repairs. On October 28, 2015, the company announced a $900 million charge to earnings for an increase in estimated future recalls. The market responded to this news with a nearly 5% drop in the company’s share price, resulting in a $950 million decline in its market capitalization. In 2016 and 2017, when the EPA and other U.S. and European regulators publicly accused Fiat Chrysler of using defeat devices to cheat NOx emissions regulations, the company’s stock price declined further by 5% and 12% respectively.

Discovery in the case was particularly challenging, given the complexity of the emissions software technology, the international nature of the claims, and that the key defendant, Fiat Chrysler CEO and Chairman Sergio Marchionne, was hospitalized (and later died) three days before his scheduled deposition. Additionally, it involved analyzing millions of pages of documents and resulted in the exchange of reports by eleven experts on issues implicating U.S. as well as European regulations.

Pomerantz sought the deposition of a former employee of NHTSA. The United States Department of Transportation (“USDOT”), like most federal agencies, has enacted a set of regulations — known as “Touhy regulations” — governing when its employees may be called by private parties to testify in court. On their face, USDOT’s regulations apply to both current and former employees. Citing these regulations, NHTSA denied Pomerantz’s request to depose a former NHTSA employee who had interacted with Fiat Chrysler. Despite the widespread application of these regulations to former employees, Pomerantz filed an action against USDOT and NHTSA, arguing that Touhy regulations speak only of “employees,” which should be interpreted to apply only to current employees. The court granted summary judgment in favor of Pomerantz’s clients, holding that “USDOT’s Touhy regulations are unlawful to the extent that they apply to former employees.” This victory has greatly shifted the discovery tools available, so that investor plaintiffs in securities class actions against highly regulated entities (for example, companies subject to FDA regulations) may now depose former employees of the regulators to get critical testimony concerning the company’s violations and misdeeds.

The claims ultimately survived multiple rounds of motions to dismiss. Initially, the emissions allegations were dismissed because the court determined that the complaint did not plead facts sufficient to demonstrate that the defendants knew that their statements of compliance were misleading. Given leave to replead, Pomerantz filed Freedom of Information Act (“FOIA”) requests with the EPA, which led to critical new information. Pomerantz successfully argued, in opposition to the defendants’ second motion to dismiss, that emails received by the company’s head of regulatory affairs from the EPA stating that the company may be violating the law were sufficient to plead that the defendants’ subsequent statements of compliance were actionable. Significantly, Pomerantz established that a company professing compliance with regulations must also disclose if their regulators have taken a different position, even if it is not a final determination by the regulator. The additional allegations in Pomerantz’s amended complaint revived the emissions claims. Ultimately, Pomerantz secured class certification on behalf of investors.

At the summary judgment stage, Pomerantz did not merely defend against defendants’ motions, but also affirmatively moved to exclude certain expert testimony proffered by defendants, and for sanctions for spoliation of evidence. As the prospect of trial loomed, defendants finally agreed to settle.

The litigation was led by Pomerantz Partner Michael J. Wernke with Managing Partner Jeremy A. Lieberman. In approving the settlement, the court stated that Pomerantz should view the award of attorneys’ fees “as a substantial compliment for you[r] work … [I]t is most clearly evidenced by the results which were quite impressive on behalf of the class. And needless to say, given my own familiarity with the extensive litigation of the class including the collateral litigation that you had to engage in, I think you’ve done substantially a really terrific job on behalf of the class and really are to be commended.”

SCOTUS Decision Endorses Pomerantz Evidence Standard

POMERANTZ MONITOR | JULY AUGUST 2021

Pomerantz Partner Emma Gilmore led a team of Pomerantz attorneys and twenty-seven of the foremost evidence scholars to submit an amicus brief to the Supreme Court of the United States in Goldman Sachs Group, Inc. et al v. Arkansas Teachers Retirement System, et al. (No. 20- 222). Pomerantz’s brief was the sole amicus brief devoted to one of only two issues before the Court: whether the defendants in securities fraud class actions bear the burden of persuasion when seeking to rebut the presumption of reliance originated by the Court in its landmark decision in Basic, Inc. v. Levinson, or whether the defendants bear only the lower burden of production, as Goldman Sachs argued. On June 21, 2021, the Supreme Court held, in a 6-3 decision, that the defendants bear the ultimate burden of persuasion in rebutting the Basic presumption. In so holding, the Court adopted the arguments asserted by Pomerantz and the law professors in their amicus brief.

To state a claim for securities fraud, a plaintiff must establish that she relied on a misrepresentation or omission when she bought or sold securities. The misrepresentation or omission artificially inflates a security’s price until the statement’s false or misleading nature is disclosed — at which point, the stock price falls, harming investors. If each plaintiff bringing securities fraud claims had to prove individual reliance on a specific misrepresentation, however, it would be virtually impossible to bring securities fraud claims as class actions, because each plaintiff would need to individually demonstrate how she relied on the misrepresentation when she bought or sold securities. In Basic, however, the Supreme Court held that securities fraud plaintiffs can invoke a presumption that they relied on a misrepresentation in buying or selling securities because, in an efficient market, the price of a security reflects all the company’s material public statements, including false or misleading statements. The “fraud on the market” presumption of reliance the Supreme Court established in Basic thus obviated the need for each member of a class to show reliance on a case-by-case basis, enabling securities fraud lawsuits to proceed as class actions.

To invoke the Basic presumption, a plaintiff must prove that (1) an alleged misrepresentation was publicly known; (2) it was material (i.e., significant to a “reasonable investor”); (3) the security traded in an efficient market; and (4) the plaintiff traded the security between the time the misrepresentation was made and when the truth was revealed. Once a plaintiff has established these four elements, all similarly situated class members are presumed to have relied upon the misrepresentation in deciding whether to buy or sell the security.

A defendant can rebut this presumption, however, by producing evidence reflecting that the alleged misrepresentation did not affect the price of the security.

Pomerantz’s amicus brief argued that defendants bore the heavier burden of persuasion:

Basic made clear that to overcome the presumption of reliance, defendants must actually “sever the link” between the alleged misrepresentation and the price of the security. 485 U.S. at 248. Halliburton II reaffirmed this holding and suggested that “sever[ing] the link” would require defendants to adduce “more salient” evidence than the plaintiffs. 573 U.S. at 282. Thus, the language of Basic and Halliburton II, together with their focus on advancing Congress’s intent, show that the Court imposed on defendants the burden of persuasion, and not just a burden of production, to rebut the presumption.

Goldman argued that Federal Rule of Evidence 301 places the burden of persuasion on plaintiffs. Rule 301 states that while “the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption,” this “does not shift the burden of persuasion, which remains on the party who had it originally.” Therefore, Goldman argued, defendants need only produce some evidence of no price impact, leaving plaintiffs with the ultimate burden of persuasion.

Pomerantz’s amicus brief, however, argued that (i) courts have the ability to reassign the burden of persuasion to any party regardless of Rule 301, and (ii) the Supreme Court’s prior decisions had assigned to defendants the burden of persuasion with regard to the presumption of reliance. Pomerantz’s amicus brief argued that:

Courts and commentators alike have understood that when necessary to satisfy the demands of the substantive law being applied—including “statutory policy”—courts may diverge from Rule 301’s default rule and allocate the burden of persuasion to the opposing party. Indeed, this Court has declared that Rule 301 “in no way restricts the authority of a court or an agency to change the customary burdens of persuasion in a manner that otherwise would be permissible” (citations omitted).

The brief explained that the language in prior Supreme Court decisions reflected the Court’s intent to assign the burden of persuasion to defendants:

This Court’s decisions in Basic and Halliburton II [Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014)] reflect precisely this sort of consideration of substantive law of a statute—here section 10(b) of the Securities Act—in both creating the Basic presumption and assigning the burden of persuasion to defendants to rebut it. Thus, the statute and its substantive law apply, not the generally applicable Rule 301.

The Supreme Court adopted Pomerantz’s and the evidence scholars’ arguments. The Court began its analysis by observing that:

We have held that Rule 301 “in no way restricts the authority of a court ... to change the customary burdens of persuasion” pursuant to a federal statute. NLRB v. Transportation Management Corp., 462 U. S. 393, 404, n. 7 (1983). And we have at times exercised that authority to reassign the burden of persuasion to the defendant upon a prima facie showing by the plaintiff. See, e.g., Teamsters v. United States, 431 U. S. 324, 359, and n. 45 (1977); Franks v. Bowman Transp. Co., 424 U. S. 747, 772– 773 (1976).

The Court then held that, as Pomerantz and the law professors argued, Basic and Halliburton II did allocate the burden of persuasion to defendants:

Basic held that defendants may rebut the presumption of reliance if they “show that the misrepresentation in fact did not lead to a distortion of price.” 485 U. S., at 248 (emphasis added). To do so, Basic said, defendants may make “[a]ny showing that severs the link between the alleged misrepresentation and ... the price received (or paid) by the plaintiff.” Ibid. (emphasis added). Similarly, Halliburton II held that defendants may rebut the Basic presumption at class certification “by showing ... that the particular misrepresentation at issue did not affect the stock’s market price.” 573 U. S., at 279 (emphasis added).

***
Thus, the best reading of our precedents ... is that the defendant bears the burden of persuasion to prove a lack of price impact.

Notably, in so holding, the Supreme Court cited with approval the Second Circuit’s ruling in Waggoner v. Barclays PLC, 875 F. 3d 79, 99–104 (2d Cir. 2017) that the phrase ‘[a]ny showing that severs the link’ aligns more logically with imposing a burden of persuasion rather than a burden of production.” Pomerantz successfully prosecuted the claims in Barclays, spearheading a similar amicus brief on behalf of numerous leading evidence scholars.

Pomerantz’s and the amicus professors’ win in the Supreme Court ensures that aggrieved investors can continue to aggregate their claims as a class against companies that defraud them.

Emma Gilmore stated, “The Supreme Court’s decision is a significant victory for plaintiffs and against defendants seeking to demolish the presumption of reliance that has allowed aggrieved investors to pursue securities act violations as a class. Twenty-seven of the foremost evidence scholars in the United States backed our position; not a single one backed the defendants’. This important win paves the ground for more victories on behalf of defrauded investors.”

Plaintiff Takeaways from High Court’s Goldman Ruling

POMERANTZ MONITOR | JULY AUGUST 2021

On June 22, 2021, in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, the United States Supreme Court rendered a decision critical to the future of federal securities fraud class actions. In a July 2 article in Law360, Marc I. Gross and Jeremy A. Lieberman analyzed what that means for the plaintiffs’ bar. The following is an abbreviated recap of their analysis.

The Court held that in determining whether allegedly misleading statements impacted stock prices, (1) a court should consider the “generic nature” of the statements by way of expert opinion, other empirical evidence and “common sense”; and (2) defendants bear the burden of persuasion to demonstrate that the statements had no impact on market prices.

While defendants have framed the holding on the first point as a big win for their bar, Marc and Jeremy beg to differ. [Eds: For a discussion of the second point, see this issue’s article on Pomerantz’s amicus brief.]

The generic nature of statements has often been considered at the motion-to-dismiss and class stages. What the Supreme Court made clear, though, was that the generic nature of statements did not render them per se unworthy of class certification, but rather, it is one factor to be weighed along with empirical evidence and expert testimony regarding actual price impact.

A central element of securities fraud claims is proof that investors relied upon allegedly misleading statements when purchasing shares. Following the 1966 adoption of Rule 23 in the Federal Rules of Civil Procedure, courts wrestled with how to prove reliance on a basis common to all class members. If each investor had to prove they actually read the misstatement, individual issues of proof would predominate, rendering securities fraud class actions unmanageable.

The concept that defendants’ misrepresentations create a fraud on the market was first developed by Abe Pomerantz, pioneer of shareholder rights litigation and founder of Pomerantz LLP, in the 1970 case, Herbst v. Able. Thereafter, courts recognized that if companies inflated their reported earnings, the stock market price of their securities would likely be inflated as well, thereby causing all investors to be defrauded.

In 1988, the Supreme Court embraced this concept in Basic Inc. v. Levinson, formalizing a “presumption” of reliance where stocks were traded in “efficient” markets, i.e., markets that rapidly priced all public information (including misinformation).

Basic also held that the presumption could be rebutted if individual investors relied on nonpublic information. The Supreme Court revisited this presumption in 2014’s Halliburton Co. v. Erica P. John Fund Inc. decision. While reaffirming the presumption’s viability, the court expanded the grounds for its rebuttal. Defendants could also cite evidence demonstrating that the misleading statements had no impact on the stock price.

The dispute in Goldman arose over market impact, or lack thereof, of statements by Goldman representing that the investment bank had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “integrity and honesty are at the heart of our business.”

The plaintiffs argued that these statements were materially misleading, citing revelations that Goldman had assembled a portfolio of mortgage-backed securities for the benefit of a short-seller, without disclosing this to Goldman clients to whom the bank sold the portfolios and who lost billions of dollars in the 2008 Great Recession. The SEC fined Goldman $550 million for its misconduct.

Goldman moved to dismiss the lawsuit, arguing that its statements were too generic and aspirational to warrant reliance. The U.S. District Court for the Southern District of New York denied the motion in 2012.

At the class motion stage, Goldman again argued that the generic nature of the statements had no market price impact, focusing on the absence of any price change when the statements were issued, nor when journalists questioned the company’s actual client conflict practices.

The plaintiff countered that Goldman had consistently denied any wrongdoing and that its misleading statements effectively maintained the price of Goldman shares until the truth was revealed, causing analysts to question the investment bank’s reputation and the stock price to crater.

The district court twice found that defendants failed to show that the Goldman stock price was not impacted by the misstatements. The U.S. Court of Appeals for the Second Circuit agreed twice. However, in the second decision, U.S. Circuit Judge Richard Sullivan dissented, asserting:

The obvious explanation for why the share price didn’t move after 36 separate news stories on the subject of Goldman’s conflicts is that no reasonable investor would have attached any significance to the generic statements on which Plaintiffs’ claims are based.

The majority retorted:

What the dissent really wants to do is to revisit the question of whether the statements are too general as a matter of law to be deemed material.

Goldman sought certiorari based on Judge Sullivan’s dissent, though its opening brief did not embrace his per se analysis, pivoting instead to the argument that generic nature is just one factor considered in determining price impact. Plaintiffs thus had no reason to disagree.

In her opinion on this issue, in which all the justices joined, Justice Barrett held that, in determining the price impact of generic statements, courts “should be open to all probative evidence on that question — qualitative as well as quantitative — aided by a good dose of common sense,” regardless of whether the issue overlapped with questions of materiality.

Critical to going forward is Justice Barrett’s observation that there may be a “mismatch between the contents of the misrepresentation and the corrective disclosure.” The Court suggested that this could occur where the earlier misstatement was very broad (e.g., “We have faith in our business model”), while the later corrective statement is specific (e.g., “Our fourth quarter earnings did not meet expectations”).

Frankly, both statements are generic and arguably a mismatch, since nothing in the prior statement targeted specific earnings growth. In contrast, in Goldman, the company stated it had strong procedures to prevent conflict of interests, yet those procedures had been flaunted.

Undoubtedly, class certification motions will now shift to battles over the degree to which misstatements and corrective disclosures match.

Courts have recognized that corrective disclosure need not be the “mirror image” of the alleged misrepresentation. Plaintiffs will likely argue that a sufficient degree of overlap in the before and after statements, coupled with empirical evidence (such as analysts’ interpretation of the corrective statements), should suffice to support certification. This will leave for later determination the degree to which the post-corrective stock price decline can be linked to the prior misstatement — an issue that experts often sort out through confounded event analysis.

Also relevant to the evaluation of price impact of such generic statements is their context; e.g., whether the generic statement was intended to distinguish the company from its own prior misconduct or that of its peers.

Plaintiffs will also likely argue that in assessing price impact, courts should consider not just what defendants said, but what they omitted. It is well settled, as expressed by the Second Circuit in 2016’s In re: Vivendi SA Securities Litigation, that “once a company speaks on an issue or topic, there is a duty to tell the whole truth, even when there is no existing independent duty to disclose information” on the matter.

In other words, having opted to burnish its corporate image by professing its integrity and internal control procedures to prevent conflicts, Goldman was arguably duty bound to disclose all related material information lest investors be misled by the omission thereof, including the risk that it had departed from that professed policy. Had Goldman acknowledged such departures, its stock price would likely have declined much earlier than it did.

Finally, courts will need to wrestle with just what is generic and what is meaningful in the minds of investors. This determination has often rested on the courts’ intuitive conception of a reasonable investor. Empirical studies have demonstrated that investors place considerable stock in the perception of management’s integrity and reliability, and that a substantial portion of a company’s market value is a function of that reputation, which such generic statements serve to burnish.

If such generic statements were intended to reassure investors of the company’s reliability and integrity, plaintiffs may well argue that such statements maintained the premium that investors were willing to pay for a company’s strong reputation. This arguably should bear upon class certification of generic statements, as well as their actionability at the pleading stage.

You may read Marc and Jeremy’s entire article on Law360.

Court Rebuffs Activist on Forced Arbitration Provisions

POMERANTZ MONITOR | JULY AUGUST 2021

By Michael Grunfeld

Johnson & Johnson (“J&J”) has been involved since March 2019 in litigation against a small shareholder represented by Professor Hal S. Scott, the Director of the Program on International Financial Systems at Harvard Law School. Professor Scott is seeking to have J&J shareholders vote on a proxy proposal instituting a corporate bylaw that would require all securities fraud claims against the company to be pursued through mandatory arbitration, and that would waive shareholders’ rights to bring securities class actions. The litigation arose after J&J rejected the proposal because it would be contrary to New Jersey law. Professor Scott then decided to file an action in Federal District Court in New Jersey contesting J&J’s rejection, in an action called The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson. Pomerantz has been involved in the litigation on behalf of the Colorado Public Employees’ Retirement Association (“Colorado PERA”), as an intervenor seeking to ensure that investors’ rights are protected.

On June 30, 2021, Judge Michael A. Shipp of the United States District Court for the District of New Jersey handed down an important victory for shareholders when it granted J&J’s and the Intervenors’ Motion to Dismiss. This decision was the result of several years of legal maneuvering. First, on April 8, 2019, the court denied Professor Scott’s motion for an order compelling J&J to include the proposal in its proxy for its 2019 shareholder meeting because he acted too late for that year. Then, after Professor Scott filed an amended complaint on May 21, 2020, J&J informed him, apparently to avoid further litigation, that if he were to properly submit his shareholder proposal for inclusion in the company’s 2021 proxy materials, the company would include it and allow its shareholders to vote on the proposal at J&J’s 2021 annual meeting.

Rather than take J&J up on its offer, which would have allowed Professor Scott to achieve his purported goal of having J&J’s shareholders decide on whether they actually want his proposed forced arbitration provision, Professor Scott continued with his litigation. As J&J explained in its motion to dismiss:

Given the Company’s agreement to include the Proposal in the 2021 Proxy Materials, there is no reason to continue to litigate this action. The only explanation for Plaintiff’s refusal to voluntarily dismiss this action is Plaintiff’s trustee’s academic interest in obtaining a judicial decision on the validity of mandatory arbitration bylaws—a crusade that Plaintiff’s trustee has pursued for years. But it is well-established that this Court cannot issue an academic decision that would amount to no more than a hypothetical advisory opinion.

The Court agreed. Judge Shipp explained in his decision granting the motion to dismiss that plaintiffs’ request for declaratory relief as to the past proxy materials is moot because the time for that proposal has passed. The Court also ruled that plaintiffs’ request for declaratory relief as to potential future proxy proposals is not ripe because it is “too hypothetical at this juncture and contingent on future events.” This is because the plaintiffs “fail[ed] to identify any specific shareholder meeting for which they ‘wish’ to resubmit the proposal, let alone the next shareholder meeting in 2022,” as well as the fact that J&J informed plaintiffs that the company “will no longer exclude the Trust’s proposal from its annual proxy materials.” The Court therefore also determined that it could not issue an opinion as to whether the Proxy Proposal is permitted under New Jersey law, because such a ruling “would amount to an advisory opinion.” Federal courts may not issue advisory opinions because they “may not decide questions that cannot affect the rights of litigations in the case before them or give opinions advising what the law would be upon a hypothetical state of facts.”

The court allowed plaintiffs a final opportunity to amend their complaint. Plaintiffs filed an amended complaint on July 13, 2021, stating that they plan to resubmit their shareholder proposal for consideration at Johnson & Johnson’s 2022 annual shareholder meeting, and seek a declaratory judgment as to the legality of the proposal. The litigation will therefore continue for the time being and Pomerantz will continue to ensure that the interests of shareholders are represented therein.

This litigation raises the critical right of shareholders to bring securities class actions in court rather than being forced into arbitration proceedings that would preclude shareholders’ ability to band together as a class. These rights are essential for shareholders to be able to seek recovery, and hold companies accountable, for securities fraud for several important reasons. One is that it would otherwise be prohibitively costly and difficult for most investors to bring claims on an individual basis. Moreover, in addition to allowing individual investors to seek redress, the availability of securities class actions provides the market and investors with an important prophylactic mechanism that deters companies and their executives from committing securities fraud. The transparency and accountability of the public court system, as opposed to the private and closed nature of arbitration, is essential for these protections to function properly.

Historically, the Securities and Exchange Commission (“SEC”) has opposed proposals to mandate arbitration of securities claims. The SEC even issued a No Action letter in this matter, telling J&J that it would not object to the company’s exclusion of Professor Scott’s Proposal. (See our prior discussion of this action: https://pomlaw.com/ monitor-issues/can-shareholders-propose-bylaws-requiring-mandatory-arbitration-of-securities-fraud-claims). This has even been the rare issue about which investors and company management have tended to agree. In addition to J&J initially rejecting the mandatory arbitration proposal here, the board of directors of Intuit, another prominent public company, recently recommended against a similar proposal by Professor Scott, because it was “not in the best interest of Intuit or its shareholders.” Over 97.6% of Intuit’s shareholders agreed when they rejected the proposal. (See https://pomlaw.com/monitor-issues/intuit-shareholders-and-directors-reject-forced-arbitration-proposalintuit-shareholders-and-directors-reject-forced-arbitration-proposal).

Pomerantz has actively defended shareholders against forced arbitration beyond the courtroom as well. Several years ago, when the SEC hinted that it might consider allowing companies to include mandatory arbitration clauses in their bylaws, Pomerantz organized a coalition of large institutional investors from around the globe to meet with then-SEC Chairman Jay Clayton and later, with both Republican and Democratic Senate staffers. On November 13, 2018 – two weeks after the SEC meetings – ten Republican State Treasurers, in a letter co-authored by the State Financial Officers Foundation, urged the SEC to maintain their existing stance against forced arbitration. (See https://pomlaw.com/monitor-issues/protecting-share-holder-rights-forcing-away-forced-arbitration-clauses).

Shareholders must continue to be vigilant in protecting their right to bring securities class actions. Professor Scott is continuing to pursue his case against J&J, others seeking to impose mandatory arbitration on shareholders might continue to take up the matter in other forums, and the issue has not been addressed by the U.S. Supreme Court. Even so, the dismissal of Professor Scott’s earlier complaint against J&J is a great result for shareholders, especially given the overwhelming rejection by Intuit’s shareholders of Professor Scott’s mandatory arbitration proposal. J&J’s calling Professor Scott out on his true intention of pursuing his longstanding “academic interest” in seeking a favorable court ruling, rather than focusing on whether shareholders actually want his proposal, explains why there was no need for the Court to rule here on a purely hypothetical question.

Q&A: Dolgora Dorzhieva

POMERANTZ MONITOR | JULY AUGUST 2021

By The Editors

The Monitor recently spoke with Dolgora Dorzhieva, an associate in the firm’s securities litigation practice group.

Monitor: Could you tell us about your early years?

Dolgora Dorzhieva: I grew up in the city of Ulan-Ude, the capital of Buryatia, an ethnic republic in Eastern Siberia, Russia, near the border of Mongolia. Ulan-Ude is adjacent to Lake Baikal, the largest (by volume) and deepest lake in the world. I spent summers on my grandmother’s farm, in the remote village of Tashir. It had dirt roads, no internet, and often no electricity. At the age of 11, I herded sheep with German shepherd dogs, protecting the flock from wolves. I feel fortunate to have experienced what is now a disappearing lifestyle. My grandmother Vera taught school in the village. She and her sisters were orphaned during World War II. Vera managed to put herself and her two little sisters through school, starting when she was 11 and they were 5 and just under one year old. My Babula Vera was my academic inspiration and one of the smartest people I’ve ever met.

M: When did you decide to be a lawyer?

DD: I have wanted to be a lawyer since I was a little girl. In Russia, you cannot apply to law school by emailing documents remotely. You have to actually travel to each school, be interviewed, and take their exams. After graduating from high school with the gold medal (as class valedictorian), I convinced my mother to buy me a plane ticket to Moscow. I’d never been there, but somehow I got her to agree. All the law schools wanted money “under the table,” which I didn’t have, so I wasn’t accepted at any. I didn’t want to disappoint my family by coming back empty-handed. Having written articles for local newspapers, I opted for journalism.

M: Did you get a degree in journalism?

DD: No, following my fourth year (five being required for a degree), I came to New York as an exchange student on a J1 visa. Finding the freedom and opportunities in America irresistible, I stayed and eventually applied for political asylum. My four years of journalism have helped me as a lawyer. This job is as much about telling a story as journalism is.

M: What path led you to a career in securities fraud litigation?

DD: I took a “Complex Civil Litigation” class with Elizabeth Cabraser at Berkeley and she inspired me to pursue a career challenging the imbalance of power between average people, like you and me, and corporations.

M: What is the most intriguing issue that you have litigated so far?

DD: We have a case pending against Deutsche Bank, alleging that it violated its own Know Your Customer procedures when it onboarded and serviced Jeffrey Epstein. Unconscionably, Deutsche Bank knew that Epstein was using his accounts to further his crimes but failed to close them because he was so profitable for the bank.

M: What aspects of your work do you find most rewarding?

DD: As a plaintiffs’ securities litigator, it is rewarding to speak truth to power. I enjoy working with investigators and hearing the stories of confidential witnesses, which can be fascinating. The most rewarding aspect is the ability to solve someone’s problem and deliver a tangible result. I defeated a professional objector in a consumer fraud case and secured a favorable settlement in an individual employment case early in my career. I still have the text messages from the client in the employment case, who thanked me profusely. Those text messages remind me of why I became a lawyer. I also find it rewarding to pay it forward: I advise students from Berkeley on judicial clerkships.

M: A generation ago, women in law faced many challenges specific to their gender. As a member of a younger generation, how far do you think we have come, and how far do we still have to go?

DD: At Berkeley, I was fortunate to meet several women trailblazers who paved the way for my generation: Professor Eleanor Swift, Justice Maria P. Rivera of California’s Court of Appeal, Elizabeth Cabraser, and Professor Herma Hill Kay. In comparison with their struggles —and, thanks to them—young female lawyers now have a far easier path. We still have a long way to go, but I want to applaud my generation for being more assertive and open-minded about the role of women in law.

M: Have you faced special challenges in the United States as an Asian immigrant?

DD: Fortunately, I have not personally experienced direct racism here. In contrast, I was at university in Moscow during the war with Chechnya. There were skinhead gangs harassing and assaulting people like myself, on the streets and in the subway, who did not look Slavic like them. I had some frightening experiences. When I arrived in New York, it was a breath of fresh air. I love America and everything this country has bestowed on me. I came here alone, 21 years old, with limited English and a thousand dollars in my pocket. Hard work and perseverance helped me get this far; I don’t think that any other country in the world would allow an immigrant to do that. Two of my most exciting memories: the day I was accepted to Berkeley Law and the day I took the oath of allegiance as an American citizen.

M: What is your perspective on the American legal system?

DD: I think it’s one of the finest and certainly most sophisticated legal systems in the world. However, it has serious flaws, especially within the criminal justice system. Of course, the Russian legal system is notoriously corrupt. Not that the American legal system is perfect; however, many corrupt individuals do get caught and punished. The jury institution within the American legal system is the backbone of our democracy and our collective power as the People. American law is constantly evolving, allowing for a lifetime of learning.

M: What advice would you give to young women considering a career in law?

DD: The same advice I would give to young men: if you are not willing to work hard and make sacrifices in your personal life, this profession might not be for you. You should cultivate your organizational skills and attention to detail. To quote Hillary Clinton: “RTDD!” (Read the Damn Documents!) In other words, there are no shortcuts. Always remember: “You don’t know what you don’t know,” and that preparation is crucial.

M: What do you hope to achieve over the next decades?

DD: I want to learn the ins and outs of trials and become an excellent trial attorney. One day, I hope to look back on an exciting career in which I have helped others.

M: Outside of the office, what are your interests or hobbies?

DD: I love nature and spend what time I can hiking in New Jersey or relaxing on the beach, at Sandy Hook. I haven’t gone to the movies since the pandemic; I miss that. A professor at City College of New York showed us “12 Angry Men;” that led me to Turner Classic Movies. I only recently saw “The Wizard of Oz;” I loved it! Music has been a huge passion since I was a kid, from the Beatles to Billie Eilish, and I really enjoy the great American art form: jazz. Miles Davis’s “Sketches of Spain” was instrumental in me passing the bar.

85 Years – The Case That Quashed Fee-Shifting Bylaws

POMERANTZ MONITOR | JULY AUGUST 2021

By The Editors

In celebration of the founding of the Pomerantz Firm 85 years ago, the Monitor continues its look back at highlights from its history.

On May 30, 2014, First Aviation Services, Inc. completed what was virtually a hostile takeover, executing a 10,000-to-1 reverse stock split that effectively took the company private by involuntarily cashing out every investor holding less than 10,000 shares. When the dust settled, Aaron Hollander, First Aviation’s Chief Executive Officer and controlling shareholder, had effectively taken ownership of the company without needing to lay out any capital. Adding insult to injury, within four days of the stock split coup, First Aviation adopted a fee-shifting bylaw that required any stockholder who challenged the ouster of their investment to pay the company’s legal fees unless they succeeded in obtaining “a judgment on the merits that substantially achieves ... the full remedy sought.” Unless any challenger prevailed on every issue that they argued, they would be forced to pay the uncapped legal fees incurred by the company.

Setting the stage for a showdown, the Delaware Supreme Court took on the issue of fee-shifting bylaws in a 2014 case named ATP Tour, Inc. v. Deutscher Tennis Bund. ATP, the operator of a professional men’s tennis tour, had successfully defeated litigation by two member federations that arose from changes made to the format and scheduling of the tour, and sought to recover its legal fees per its fee-shifting bylaw. The Delaware Supreme Court ruled that “[u]nder Delaware law, a fee-shifting bylaw is not invalid per se, and the fact that it was adopted after entities became members will not affect its enforceability.”

The same year, Pomerantz was approached by a client seeking to stop the forced liquidation of his investment in First Aviation. With a genuine interest in the company and its financial prospects, the investor had no interest in being forced to divest his shares, especially at a rate that was several dollars below what the stock had recently traded at. Although the classwide damages were modest, Pomerantz considered the issue important, and took on the case on behalf of this client and approximately 200 other investors who were just two weeks away from being booted as shareholders.

After the complaint against First Aviation (Strougo v. Hollander) was filed, a series of ‘after the fact’ revelations raised the stakes of the case on several levels. First, the company revealed that it had received a large government contract — one that it knew about before the reverse stock split was announced but failed to disclose to the market — and one from which the now cashed-out investors would not realize any benefit. Second, First Aviation revealed the existence of the fee-shifting bylaw that placed the plaintiffs in substantial potential financial jeopardy. And, later in the litigation, as we will recount, a third revelation provided the key to victory.

While Pomerantz was uncovering the true depth of the deception surrounding the reverse stock split, the plaintiffs’ bar at large took notice of this modest securities case. The potential recovery was just a few hundred thousand dollars, but an adverse ruling that saw such bylaws being sustained threatened the future viability of securities litigation as we know it. The adoption of fee-shifting bylaws would be the death knell for shareholder litigation, as no plaintiff would risk being on the hook for legal fees and expenses.

With those stakes in the balance, the attention on this case was intense. Pomerantz partners Gustavo Bruckner, Marc Gross and Jeremy Lieberman were deluged with missives from other plaintiffs’ firms attempting to persuade them to either not litigate Hollander, or to allow larger firms to step in to find some solution ... any solution ... other than a judicial decision.

Under tremendous pressure not to risk an adverse ruling, Pomerantz saw an opening — ask the court to stay its ruling on the complaint itself but split out the issue of the bylaw first for a ruling on its validity. Recognizing the larger issue at hand, the Court agreed.

It was at this stage that Pomerantz made a shocking discovery — the yet-to-be seen bylaw had been adopted a mere four days after the stock split and applied retroactively to all shareholders, even those who were cashed out in the transaction.

This revelation drew the map for a pathway to victory without jeopardizing the foundation of securities litigation. Pomerantz asked the Court to further limit its ruling to one question — is a bylaw adopted after a former stockholder has already cashed out still binding on them? Clearly, bylaws are binding on all current shareholders at the time of adoption and those who buy stock afterwards. But, based on the principle of Delaware law that has positioned the stockholder-corporation relationship as akin to a contract, that ‘contract’ would end as soon as the stock is either sold or taken away — as in the situation of a cashed-out reverse stock split. It followed that a fee-shifting bylaw, adopted after the investor is no longer holding stock in the company, would not apply to them.

As a result, in March 2015, Chancellor Bouchard of the Delaware Court of Chancery ruled that “[A] stockholder whose equity interest in the corporation is eliminated in a cash-out transaction is, after the effective time of that transaction, no longer a party to [the] flexible [corporate] contract. Instead, a stockholder whose equity is eliminated is equivalent to a non-party to the corporate contract, meaning that former stockholder is not subject to, or bound by, any bylaw amendments adopted after one’s interest in the corporation has been eliminated.”

On the effect of fee-shifting bylaws, the Chancellor further wrote that “the Bylaw in this case would have the effect of immunizing the Reverse Stock Split from judicial review because, in my view, no rational stockholder— and no rational plaintiff’s lawyer—would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even though the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct.”

Simultaneously, as Pomerantz sought to sway the court, it also spearheaded efforts to find a legislative solution that would forestall any fallout in the event of an adverse decision in Hollander. The Firm campaigned to educate Delaware’s governor, Supreme Court, and legislature in regard to the scope of the threat that fee-shifting bylaws posed to shareholder rights and the balance of the corporate ecosystem — an issue very germane in the state that is the home of the most newly formed corporations every year.

After discussions between prominent legal academics, members of Delaware’s executive, judicial, and legislative branches, and the representatives of the plaintiffs’ bar, examining the effect that fee-shifting bylaws would likely have on shareholders’ rights and their ability to mount legal challenges to corporations in court, Delaware realized it needed to act. On June 11, 2015, the Delaware General Assembly passed Senate Bill 75, a statute which amended the Delaware General Corporation Law to effectively prohibit fee-shifting bylaws. Governor Jack Martell signed the bill into law on June 25, 2015.

Do Those Billions of Dollars Left on the Table Belong to You?

POMERANTZ MONITOR | MAY JUNE 2021

By Jennifer Pafiti

In 2020, as courts and law firms adapted to operating during the pandemic, the number of securities class actions filed in federal and state courts was 22% lower than in 2019, according to Cornerstone Research. Its report, Securities Class Action Filings: 2020 Year in Review, reveals that “the 2020 total [334 new cases], however, is still 49% higher than the 1997-2019 average.”

In the last decade, there has been a significant spike in securities class actions brought outside the United States, in response to the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which barred recovery for losses in foreign-traded securities under the U.S. federal securities laws. This trend continues to expand. Canada, Australia, and the Netherlands are becoming experienced in the class action process. Other jurisdictions, such as Poland, the U.K., Japan, Israel, and Saudia Arabia are moving towards that end by enacting class action or collective action laws to protect shareholders. Germany and Brazil, as well as other juris- dictions, have become host to opt-in litigations.

According to ISS Securities Class Action Services LLC, there were 133 approved monetary securities-related settlements worldwide in 2020, with a total of $5.84 billion recovered for defrauded investors. Investors, however, do not receive any money from a settlement unless they file a claim as part of the settlement administration process. In 2005, Professors James Cox and Randall Thomas, in a seminal article in the Stanford Law Review, reported that, as evidenced by their empirical research, more than two-thirds of large institutional investors failed to file claims in securities class action settlements. Although the number of institutional investors that do file claims is likely larger today, billions of dollars continue to be left on the table.

Due to the opt-out nature of American securities class actions—in which individuals and entities that fall within the class definition are automatically class members unless they take affirmative steps to opt out—damaged investors frequently have their rights vindicated in court without even knowing they are members of the class or, indeed, anything else about the litigation. That is why it is essential that institutions have access to a robust research and monitoring system to ensure they do not miss out on opportunities to recover assets.

Once an investor is aware that a potentially recoverable claim exists, navigating the claims filing process requires knowledge, experience and patience. To successfully recover assets in securities related actions requires expertise beyond simply gathering all one’s holdings and transactions into a spreadsheet and filling out a form.

Even with a favorable settlement in hand, investors should assess the fairness of its terms, particularly where their losses are significant. In some instances, the plan of allocation may not adequately compensate certain class members whose claims may be stronger than those of other class members. A classic example would involve claims arising under both Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. Section 10(b) prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. Section 11 imposes strict liability against newly public companies for misstatements, even unintentional, in their registration statements and permits recovery for any decline below the stock’s initial offering price. Since Section 11 claims, unlike Section 10(b) claims, do not require proof of scienter—that is, the intent or knowledge of wrongdoing—they are stronger and should be treated more favorably under a plan of allocation. However, this is not always the case, and, in such situations, a fund may be well-advised to file an objection to the plan of allocation.

Pomerantz’s keen oversight of settlements’ fairness to our clients has, over the years, led to concrete results. For example, in the St. Paul Travelers Companies securities fraud litigation, Pomerantz challenged the formulae used to calculate recognized losses in the settlement terms. Consequently, lead counsel revised the plan of allocation, resulting in a 60% increase in recognized losses for our client.

If a fund’s damages are significant, it might choose to opt out of the class to pursue its own, individual claims. To reach this decision, it must weigh the likelihood of increased recovery against giving up a guaranteed payout from successful litigation, the risk of no recovery if the case fails, and the costs of litigation.

To properly monitor portfolios and to receive maximum recovery, at least a basic understanding of the substantive laws involved in the class action is necessary. This has become increasingly complex, as nontraditional case allegations emerge: for example, antitrust class actions in which the underlying anticompetitive conduct impacted the price of publicly traded securities and complex financial products; litigation related to the trading of credit-default swaps and foreign exchange products; and claims concerning cybersecurity, cryptocurrency, special purpose acquisition companies (SPACs), and #MeToo allegations.

For many institutional investors, the task of professional, active portfolio monitoring is too complex, too time-consuming, and too expensive to do in-house. In response to their needs, Pomerantz offers our clients PomTrack®, a proprietary, complimentary global portfolio monitoring service that notifies fiduciaries when assets they oversee suffer a loss that may be attributable to financial misconduct.

Spearheaded by Partner and Head of Client Services Jennifer Pafiti, PomTrack® provides one of the largest global portfolio monitoring services in the United States—currently monitoring for over 100 of the most influential institutional investors worldwide with combined assets in excess of $6.8 trillion. The PomTrack® team comprises attorneys and forensic economists, damage analysts, claims filing specialists, and paralegals, as well as a dedicated team of senior and junior support staff.

For nearly two decades, Pomerantz has been providing this portfolio monitoring service at no cost to our clients. The service includes the preparation of customized, monthly PomTrack® Reports that advise clients of every settlement in which they might be eligible to participate, and the deadlines for objecting and filing proofs of claims.

For a modest fee—a percent of the assets a client recovers in a settlement—the PomTrack® team also offers expert claims filing services for all stages of the process: filing the claim, working with the Claims Administrator to cure any deficiencies, and ensuring that the client receives the recovery to which it is entitled. If the client does not recover from the settlement, no fee is charged.

To learn how PomTrack may assist your fund in portfolio monitoring and claims filing, please contact Jennifer Pafiti: jpafiti@pomlaw.com

The Risks of Investing in SPACs

POMERANTZ MONITOR | MAY JUNE 2021

By Brandon M. Cordovi

Special Purpose Acquisition Companies (“SPACs”) burst onto the Wall Street scene, seemingly from nowhere, as the COVID-19 pandemic swept the world by storm in 2020. Their rise to prominence has been so profound that it has garnered the attention of the SEC and the plaintiffs’ bar. The glamour of SPACs has even drawn superstar athletes, such as Serena Williams and Alex Rodriguez, as well as entertainers, such as Jay-Z and Ciera, to take on prominent roles as investors and advisors.

What is this seemingly newfound investment opportunity that everyday investors and celebrities alike have flocked to? A SPAC is a publicly traded company that is set up by investors with the sole purpose of raising money through an IPO to acquire an existing company. The SPAC itself does nothing at all. Typically, its only asset is the money raised through the IPO to fund a targeted acquisition.

These shell companies are usually formed by a team of institutional investors. At the time the shell company goes public, it is not certain what existing company it is seeking to acquire. After the money is raised through an IPO, it is placed in an interest-bearing account until the acquisition can be made. The SPAC generally has up to two years to identify a target company to acquire. Once a target company has been identified and an agreement is in place, the acquisition must be approved by the SPAC’s shareholders through a vote.

Once the acquisition is completed, shareholders are left with the choice of either converting their shares of the SPAC into shares of the acquired company or redeeming their shares and receiving their investment back plus the accrued interest. If the SPAC fails to identify a target company within the two-year time limit, the SPAC is liquidated, with all shareholders receiving their original investment back along with accrued interest.

Since SPACs have risen to prominence only recently, many investors assume they are new. In fact, SPACs have been around for decades but have scarcely been used. They became more prevalent recently due to the extreme market volatility caused by the COVID-19 pandemic. Existing companies looking to go public were left with a choice: either postpone their IPOs due to the uncertainty, or merge with a SPAC.

The benefits of merging with a SPAC are fairly straightforward. As Peter McNally, global sector lead at Third Bridge, a research firm, explains, “SPACs are giving management and boards of companies more options for quicker and more efficient ways to go public.” Registering an IPO with the SEC can take up to six months, while merging with a SPAC takes only a couple of months to complete, providing the acquired company with quicker and easier access to capital. Additionally, in theory, companies acquired by SPACs are not subject to the same scrutiny under the securities laws and by the SEC, as they were not introduced to the market through IPOs. As a result, SPACs have been more aggressive in making forward-looking statements, prior to targeted acquisitions being finalized, to draw investors in. These perceived benefits are also where the risks lie and are the reason why SPACs have become the focus of the SEC’s crackdown.

The risk of investing in a SPAC for everyday investors is significant. For starters, investors do not know which company the SPAC will seek to merge with. That uncertainty, in and of itself, creates risk. Further, SPACs do not seem to be exercising the same rigorous due diligence that is performed during a traditional IPO. The primary concern of a SPAC is to find a target company to acquire before the two-year time limit runs out. For that reason, SPACs are incentivized to find an acquisition that can close quickly rather than finding the best acquisition target based on performance and price.

Typically, being unable to access the hottest IPOs, an average retail investor’s ability to access a SPAC as soon as it goes public may tempt them to accept the risks.

Investors are not the only ones who bear some risk with their involvement in SPACs. Target companies run the risk of having the merger rejected by the SPAC’s shareholders. Once a company has been chosen for acquisition, the de-SPAC process, which is similar to that of a public company merger, begins. The SPAC, acting as the buyer, requires the approval of its shareholders. Generally, more than 20% of the voting stock approval is mandatory.

Given the recent surge in SPACs, it comes as no surprise that the SEC and the plaintiffs’ bar have taken notice. In a statement issued on April 8, 2021, John Coates, the SEC’s acting director of the Division of Corporation Finance, cautioned that de-SPAC acquisitions are similar to IPOs and should be treated as such under the securities law. Further, Coates warned, the perception that SPACs are subject to reduced liability is “overstated at best” and “seriously misleading at worst.”

Coates warned of the various dangers of forward-looking statements being issued by SPACs, such as their speculative, misleading, and sometimes fraudulent nature. Risk disclosures in SEC filings may serve as a “safe harbor defense” for public companies in securities litigation that arises from their statements to investors, in that predictions, projections and expectations in disclosure documents may not be construed as misleading if they contain sufficient cautionary language disclosing risks. Coates specifically questioned whether SPACs are excluded from the safe harbor under the PSLRA, given their similarity to IPOs, which are excluded. However, there is no definition as to what an IPO consists of in the PSLRA or any SEC rule, and case law interpreting what constitutes an IPO under the PSLRA is sparse. Coates stated that the SEC is considering making rules or providing guidance as to how the PSLRA safe harbors apply at the final stages of a SPAC transaction.

Given the uncertainty regarding whether the safe harbor applies to SPACs, they are expected to be more cautious about the forward-looking statements in their disclosures. This will diminish the appeal of SPACs to investors who have relied on these forward-looking statements to anticipate the type of acquisition targeted by a SPAC in which they invested. It is important to note that regardless of whether the safe harbor applies to SPACs, they are still prohibited from making false or misleading statements in their disclosures. With the SEC turning their attention to SPACs, the forward-looking representations issued are now under the microscope for such infractions.

Further, between September 2020 and March 2021, at least 35 SPACs were sued by shareholders in New York state courts. Generally, these lawsuits allege that SPAC directors breached their duties by providing inadequate disclosures regarding the proposed acquisition. Some of the lawsuits also claim that the SPAC itself, along with the target company and its board of directors, aided and abetted the SPAC directors’ breaches. Notably, all of these lawsuits are limited to state law tort claims and do not assert any state or federal securities claims. The lawsuits were all filed after the de-SPAC transactions were announced but before shareholders had voted on approving the transactions. As such, the lawsuits seek preliminary injunctive relief to prevent the acquisitions from being finalized.

Lawsuits against SPACs remain in their infancy. The only cases in New York state court that have been resolved are those where plaintiffs stipulated to voluntarily dismiss the action. The lawsuits, however, provide a clear indication that the plaintiffs’ bar is monitoring and pursuing SPACs. The Harvard Law School Forum of Corporate Governance anticipates there will be increased litigation in federal courts regarding SPACs, including claims under section 10(b) of the Securities Exchange Act. Given that SEC guidance and intervention appears to be on the horizon, it appears likely that more litigation will follow.

Will SPACs remain prevalent over the long haul, or fade into the background where they have resided for decades? The SECs intervention, or lack thereof, will play a large part in determining that. However, Paul Marshall, co-founder of the investment firm Marshall Wace, did not mince words in his criticism of the future outlook of SPACs, predicting that the phenomenon will “end badly and leave many casualties.” Unsurprisingly, based on his outlook on SPACs, Marshall is shorting them and betting on their eventual demise. Time will tell whether he is correct. However, the returns on SPACs have steadily declined, and it appears the phenomenon which blossomed as uncertainty flooded the market may already be fading as that same uncertainty begins to dissipate, the world begins to reopen, and a new normal is established.

The Value of Saber-Rattling Proposals to Break the Shield of Business Judgment

POMERANTZ MONITOR | MAY JUNE 2021

By Michael J. Krzywicki

A once-in-a-century pandemic is not the only parallel between our current times and the Progressive Era of the late nineteenth and early twentieth centuries, a period of widespread social activism and political reform across the United States. A current progressive issue is shareholder action in response to racial equity and how it impacts shareholder value. Two related stories are now unfolding, as the U.S. Securities and Exchange Commission (“SEC”) blocks Amazon’s effort to stop shareholder votes for racial equity audits, and a Delaware lawsuit says Pinterest’s race and gender bias hurts business. These stories echo the political overtones of the labor disputes of the Progressive Era. In addition, they raise the question: does the business judgment rule survive in today’s political climate that values diversity more than ever?

The mere fact that shareholders are owners does not mean much under Delaware law: the business and affairs of every corporation are managed by or under the direction of the board of directors, not the shareholders. Shareholders have literally no say under state law, except in certain fundamental matters where the General Corporation Law gives them a vote, such as in the election of directors, amendment of charter and bylaws, and certain fundamental transactions. Under black letter law, directors not only can ignore the wishes of the shareholders, but also, they must actually exercise their own business judgment. The shareholders, for their part, can remove directors; but they cannot sue the directors for failing to do their bidding.

On the other hand, federal securities law acts as if shareholders have a right to express their preferences to directors. That is not exactly true under state law, but it is the law that governs shareholder access to the corporate proxy. The concerns investors raise over day-to-day business judgments versus corporate governance is more about federal securities law than it is about state corporate law. But federal securities law generally only allows for precatory shareholder proposals, not mandatory ones.

So much of why the issue of the connection between racial equity and shareholder value is intriguing involves the clash of several different legal principles and policy objectives, which seems to require expanding the narrow and unequivocal duty of care owed by directors.

The Use of Disclosed Interests in Business Judgment

There are at least two different contexts that might expand the narrow and unequivocal meanings of business judgment decisions by a board of directors.

The business judgment rule states that boards are presumed to act in “good faith”—absent evidence to the contrary—regarding the fiduciary duties of loyalty, prudence, and care owed to their shareholders. The general problem with interpreting the business judgment rule in the linguistic context of corporate governance has been well canvassed since the scandals at Enron, Global Crossing, ImClone, Tyco, and WorldCom. That is, the duty of care directed to maximize shareholder value must minimally ensure that the corporation remains a going concern. The cure for this problem is also well known: The board attends to the interest of other stakeholders such as employees, customers, and the economic community writ large.

Unfortunately, although this advice is reasonably sound, it is not very helpful. The advice—exercising judgment as a purposeful guide to careful decision making—is a broad generalization that itself must be decided. A rule for exercising judgment that itself demands judgment calls is not much help. This particular rule tells directors to attend to the “interest,” but the word “interest” is a word like any other word; it too is equivocal. In other words, the technique for exercising purpose appears to be a variant of the first possibility that directors use linguistic context. If this conclusion is correct, then the second possibility collapses into the first except for the distinction that one is expanding the linguistic context beyond the bounds of a single interest. Consequently, unless there is some way to broaden the scope of possible interests, the rule forecloses as many shareholder proposals as it considers. The SEC recently expanded on this point about the evidence that is used to discern business purpose.

Last August, for the first time in thirty years since Chancellor William Allen, of the Delaware Court of Chancery, famously remarked that “a corporation is not a New England town meeting,” the SEC revised the periodic disclosure requirements under Regulation S-K. In many instances, the new regulation replaces the formal prescriptive requirements with flexible guidelines intended to elicit company-specific and industry-wide information deemed material to investors’ understanding of the business purpose behind publicly traded companies. By the same token, the new regulation would appear to give directors new latitude under the purpose-based disclosure requirements to create and provide the information they see as material in this wider context. These broad mandates seem to fit the contours of the current transatlantic movement in unexpected ways. The events of 2020 turned the spotlight on corporate America’s role in creating and perpetuating societal inequities, a development reminiscent of the century-old disputes arising from a formalistic reliance on vested rights of property and freedom of contract by corporations to justify injunctions against labor reform activity and invalidation of labor-protective legislation. During the Progressive Era, Justice Oliver Wendell Holmes led the charge from the Supreme Court bench in dissent from the formalistic view and put enormous pressure on corporations to publicly adopt stakeholder-centric proposals.

The cases Holmes heard submerged a conflict not unlike the present issue between two legally acknowledged “rights”—the right to contract freely that courts recognized, and the right to compete freely that courts suppressed. Because the controversies involved two conflicting categories of “vested” rights, Holmes insisted that deductive reasoning could not neutrally decide the cases. Rather, resolution of the issue required a process of policy balancing. Holmes perhaps put the point best in dissent from the Court in Lochner, where he stated: “General propositions do not decide concrete cases.”

The highly concentrated institutional investiture in today’s stock market, coupled with widespread endorsement from asset managers and comptrollers backing the stakeholder model, may further drive boards to adopt an expanded view of corporate purpose in their decision making.

As Holmes wrote, “if we take the view of our friend the bad man, we shall find that he does not care two straws for the axioms or deductions, but he does want to know what the Massachusetts or English courts are likely to do in fact.” The new SEC disclosures allow shareholders to know in fact under federal securities law what may likewise be more amendable to the needs of modern society, if directors are more open about the non-shareholder value judgments that influenced board decisions, instead of instinctively trying to veil them behind a curtain of syllogistic formal business judgments. Otherwise, companies are likely to face future shareholder actions for their continued failure to disclose such material information.

Q&A: Linda Kellner

POMERANTZ MONITOR | MAY JUNE 2021

By The Editors

Pomerantz recently spoke with Linda Kellner, the President of Savasta & Co., Inc., a third-party administrator for Taft-Hartley pension plans.

Monitor: What path brought you to a career in pension management?

Linda Kellner: I was hired by the Teamsters Local 295 as a secretary. I eventually became the bookkeeper’s assistant, and then a claims examiner working in the pension department, where I learned everything that went on in the fund office. While working for the Teamsters, I got a Bachelor of Business Administration. By 1994, when the Teamsters’ fund’s third-party administrator left, I had long experience working for their pension and welfare funds. They offered me the job, but I had two little kids at home and didn’t want the added responsibility. The fund hired Neil Savasta as their third-party administrator, and I became an employee of Savasta & Co.

M: What changed for you then?

LK: Neil and I started reaching out to other funds that needed a third-party administrator, and the company grew. I took the requisite courses and earned the Certified Employee Benefit Specialist designation from the International Foundation for Employee Benefit Plans. I served as Executive Vice President of the firm for a while. As Neil aged and started stepping back, I became the President and Neil took on the role of Chairman. It is four years now since he passed away.

M: And the Teamsters 295 funds are still Savasta clients?

LK: Yes. I’ve been working for that local for decades now, so they are very near and dear to my heart.

M: The Teamsters 295 funds are lead plaintiffs in a securities class action against AT&T that Pomerantz is litigating. What was your role in signing them on?

LK: Pomerantz provided us with the information needed, the reasons they thought it would benefit the funds to serve as lead plaintiff. We, of course, had to bring it to the board of trustees for the funds, who opted to go forward. There’s a good group of trustees on these funds, and the employer side is big corporate. Both the employer side and union side agreed.

M: Is there often friction on boards that are equal parts employer and union trustees?

LK: With some boards, sure, when they come to the table, there is tension on both sides. The trustees on this board, though, have been working together a long time and are a pretty cohesive group, truly interested in pursuing things that will make the members happy and make their lives better.

M: Have you had to devote much time to the litigation in which the Teamsters is lead plaintiff?

LK: No, not at this time. Pomerantz is taking care of almost all the business and daily events that go on within this class action.

M: What common concerns are hearing from your clients now?

LK: There are pension funds that are insolvent, or that are critical and declining. Everyone is anxiously waiting for the Pension Benefit Guaranty Corporation’s guidance on the American Rescue Plan, which will be out in mid-July. Many plans will benefit. Pension funds are long-term entities; most are projected to provide benefits for 40 or 50 years. The American Rescue Plan aims to provide pension benefits for 30 years. The funds that are insolvent are really going to get a nice chunk of money that will make a big difference in what they can do with their income and contributions and investments. Considering that the PBGC in October 2020 had projected its own insolvency in 2024 or 2025, this is quite something.

M: If you could make one change to the Taft-Hartley fund plans, what would it be?

LK: I would like to see more awareness among members as to the great benefits that they have. The old timers tend to be more appreciative because they’re closer to retirement, but younger members generally take their benefits for granted. A lot of them don’t contribute to the premiums – those are paid directly by the employer. A percent of the members’ pay goes into their pension and welfare and annuity funds, rather than their paychecks, but they often don’t realize what they’re receiving in return.

M: How could that change? With education?

LK: Definitely. We do our best, writing regular newsletters for some of our funds. Recently we did an article about a member who passed away without ever changing his beneficiary. So everything he had went to his mother, even though he’d been married for something like twenty years. It was amazing how many phone calls we got after that, with people checking who their beneficiary was or asking for a change of beneficiary form.

M: Is there anything else you would like to mention?

LK: Just that I have enjoyed my career. It turned out that what I thought would be a temporary job evolved into a rewarding, lifelong career.

85 Years — A Seismic Shift in Assessing Losses

POMERANTZ MONITOR | MAY JUNE 2021

By The Editors

Illicit stock options, a slush fund for executives, an international fugitive on the run and some good, old-fashioned lawyering that wrought justice for defrauded investors. In celebration of the founding of the Pomerantz Firm 85 years ago, the Monitor continues its look back at highlights from its history.

In 2006, Pomerantz filed a securities fraud lawsuit against Comverse Technology, Inc. and some of its directors, alleging a stock options back-dating scheme by Comverse. Unbeknownst to investors, the company’s executives, including its founder and former CEO, Jacob (“Kobi”) Alexander, were retroactively “cherry picking” dates when the stock closed at its lowest and falsely claiming that the options were granted on those dates. The exercise prices for the backdated options were thereby based on the stock closing price on the cherry-picked dates. Because the options were, in fact, granted on dates when the market price was higher, backdating placed the options “in the money” the instant they were granted. In some cases, according to the complaint, such grants were made to fictitious employees in order to create a slush fund of backdated options for management to dole out as it pleased.

Investors suffered huge losses when Comverse disclosed its backdating scheme in March and April 2006, as the company’s common stock price dropped 20 percent on the heels of the two announcements.

Judge Nicholas G. Garaufis of the Eastern District of New York referred the lead plaintiff motions to U.S. Magistrate Judge Ramon E. Reyes, Jr. The Magistrate Judge denied Pomerantz’s motion to be named lead counsel on behalf of the Menorah Group, made up of several Israeli institutional investors, and instead named the Plumbers & Pipefitters National Pension Fund (“P&P”) as lead plaintiff.

Pomerantz filed an objection to the Magistrate Judge’s Report and Recommendation and appealed his decision to the district court. The Menorah Group based its objection on the fact that most of P&P’s losses resulted from “in and out transactions,” in that both the purchase and the sale of the shares took place before the alleged misrepresentations were disclosed. The Menorah Group argued that if the “in and out” shares were excluded, P&P did not suffer a $2.9 million loss, but instead actually realized a $132,722 gain. Judge Garaufis agreed, vacated the Magistrate Judge’s ruling, and appointed the Menorah Group as lead plaintiff.

In its objection the Firm cited, among other cases, the then-recent Supreme Court decision Dura Pharmaceuticals, Inc. v. Broudo. There, the Court clarified the applicable standards for pleading loss causation: a purchaser must have retained shares at the time the truth was disclosed to the market. This ruling, plaintiffs alleged, essentially endorsed the Second Circuit Court of Appeals’ decision in Lentell v. Merrill Lynch & Co., Inc., which held that to establish loss causation, a plaintiff must allege “that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.”

This decision secured by Pomerantz effected a seismic shift in how courts assess plaintiffs’ losses at the lead plaintiff stage. Patrick V. Dahlstrom, who led Pomerantz’s litigation with Marc I. Gross, stated at the time that the decision “reinforces the growing recognition that courts must conduct such analysis of the facts ... and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest.”

In December 2009, after years of hard-fought litigation, Comverse and Kobi Alexander agreed to settle the lawsuit for $225 million, with $60 million of that total to come from Alexander’s own pockets. The settlement constituted the second-largest recovery ever for shareholders alleging securities fraud claims related to options backdating. The recovery from Alexander was one of the largest ever in a federal securities action from an individual defendant.

After the initial complaints in the action were filed, the three main perpetrators of the fraud – Alexander, CFO David Kreinberg, and General Counsel William F. Sorin – were indicted by the U.S Department of Justice. Rather than surrender to the U.S. Attorney, as he had agreed to do, Alexander fled the country and surfaced months later in Namibia, which did not have an extradition treaty with the United States. Back home in the U.S., his possessions were seized, and he lived as a fugitive from justice, albeit an extraordinarily well-heeled one, for about ten years.

In 2011, Alexander settled the civil charges with the SEC and surrendered bank accounts worth $46 million to federal authorities. In 2016, after a plea bargain, he returned to the U.S. to face criminal charges. In February 2017, he sat in an Eastern District courtroom before Judge Garaufis – a stroke of poetic justice – who sentenced him to 30 months in prison. When Alexander’s attorneys requested that he be free on bail prior to sentencing, Judge Garaufis reportedly said, “Spare me – I wasn’t born yesterday.” A month later, Alexander was transferred to Israel to carry out his remaining sentence; he was released on probation in October 2018 and was not allowed to travel abroad until April 2019. The Monitor was unable to confirm reports that he is now living freely in the United States.

Pomerantz Settles Ground-Breaking BP Litigation

POMERANTZ MONITOR | MARCH APRIL 2021

After nine years of hard-fought litigation, Pomerantz recently obtained a confidential, favorable monetary settlement from BP plc for our nearly three dozen institutional investor clients from around the globe that had sought to recover losses caused by BP’s devastating 2010 Gulf of Mexico oil spill, the worst such disaster in U.S. history. Our ground-breaking work created a new path forward for investors in foreign-traded securities to pursue remedies in U.S. courts, while establishing cutting-edge precedent for securities claims brought under English common law.

Shortly after the Deepwater Horizon rig exploded and sank less than 100 miles from the U.S. coast, the price of BP’s ordinary shares and American Depository Shares (ADSs) plummeted, amid revelations of the spill’s true scale and BP’s inadequate safety commitments and inability to contain it. While BP investors could pursue U.S. federal securities law claims in U.S. courts to recover their losses in its U.S.-traded ADSs, the U.S. Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) barred use of those laws to reach foreign-traded securities, undoing decades of prior precedent. Investors in BP’s London-traded ordinary shares seemed to lack legal recourse in U.S. courts.

Pomerantz’s BP litigation has the distinction of being the earliest successful workaround to the roadblocks set by Morrison. Our novel arguments – and our successes – paved the way for investors, both foreign and domestic, to pursue foreign law claims, against a foreign company, seeking recovery for foreign-traded shares, in U.S. courts post-Morrison.

Given our institutional investor clients’ lack of remedy under the U.S. federal securities laws for their losses in BP’s ordinary shares, starting in 2012, we began filing individual lawsuits alleging common law claims, which were consolidated for pretrial proceedings before U.S. District Judge Keith Ellison of the Southern District of Texas. Thereafter, Pomerantz survived three rounds of BP’s motions to dismiss, as well as BP’s related motions for reconsideration and other contested motions, to safeguard our clients’ rights. In the process, the Firm earned a series of closely followed, cutting-edge wins on behalf of the 125+ institutional investors who ultimately pursued such claims against BP.

In 2013, Pomerantz survived BP’s first motion to dismiss, which had argued that the U.S. Constitution’s Dormant Commerce Clause and the forum non conveniens doctrine required dismissal of our U.S. lawsuits in deference to U.K. courts, which impose a loser-pays regime that disincentivizes high-risk, contingent litigation. This win secured the rights of U.S. institutional investors, who also had U.S. federal law claims concerning BP’s U.S.-traded American Depository Shares, to simultaneously pursue English common law claims concerning their BP ordinary share losses in U.S. court.

In 2014, Pomerantz survived BP’s second motion to dismiss, securing the same rights for foreign institutional investors by again defeating BP’s forum non conveniens argument, which this time had argued that non-domestic investors, including ones based in the U.K., should have their cases dismissed for pursuit in U.K. courts. We also persuaded Judge Ellison to reject BP’s argument that a U.S. federal statute, the Securities Litigation Uniform Standards Act of 1998, should be extended to cover foreign law claims and thereby serve to extinguish them in deference to non-existent U.S. federal statutory remedies. This win opened the door for institutions worldwide to pursue claims within the limitations period, including Pomerantz clients from Canada, the U.K., France, the Netherlands, and Australia.

In 2017, we survived BP’s third motion to dismiss, securing the rights of investors who retained BP stock, rather than purchased it anew, in reliance on the fraud to seek recovery under English law for investment losses. The U.S. Supreme Court had barred this approach, often called a “holder claim,” under the U.S. federal securities law in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). However, we spent years developing detailed documentary evidence with our clients and their outside investment management firms and consulting with an English law expert to develop robust amended complaints alleging the predicates to a “holder claim” theory under English law. To do so, we fought to secure our right to amend our complaints to plead this theory, over BP’s opposition, which Judge Ellison granted. This years-long effort developed facts evidencing actual, documented reliance by our clients and their investment managers on specific aspects of the alleged fraud and their contemporaneous decisions on identifiable dates to maintain their BP investment, rather than reducing it, reallocating it, or eliminating it altogether. The Court agreed that, for some Pomerantz clients, we had pled cognizable damages, legally sufficient reliance on the alleged fraud, and adequately memorialized investment retention decisions. This ground-breaking ruling has precedential value for both U.S. and Commonwealth of Nations courts, given the scarcity of precedent validating a “holder claim” theory of recovery for investors.

Beyond these motion wins, Pomerantz also applied considerable pressure on BP through our extensive, sustained discovery efforts. The Firm oversaw a multi-year effort to access BP’s most relevant documentary evidence. We worked with e-discovery vendors to run analytics, threading, and search terms on 2 terabytes of BP materials (~1.5 million documents) from prior oil spill litigation and oversaw a review team that pared the data set down to 45,000 documents. Having done so, we pressed BP for additional documents and later pursued a successful motion to compel, over BP’s opposition, that resulted in the Court’s ordering BP to run 60+ Pomerantz -authored searches on the email accounts and document drives of the individual defendants, other high-value BP employees, and BP Investor Relations personnel. We oversaw efforts to search and review the resulting ~150,000+ documents. We worked with consultants to load the post-review documents into a trial preparation platform to enhance our ability to examine witnesses, brief further motions, and prepare for trial. Throughout these efforts, we organized the other plaintiff firms with lawsuits on file to contribute resources and attorney hours, achieving efficiencies through collaboration that kept our clients’ litigation expenses relatively low.

In early 2021, before our clients or their outside investment managers were ever deposed, we succeeded in resolving the BP litigation for a confidential, favorable monetary settlement for our nearly three dozen clients, including three newly signed clients who, just months earlier, had switched representation after eight years of litigation to retain Pomerantz as their BP counsel.

Pomerantz’s BP litigation was led by Partner Matthew L. Tuccillo, who briefed and argued most motions on behalf of the Firm and its clients, oversaw the Individual Action Plaintiffs’ Steering Committee, and served as sole interface with BP and the Court on behalf of all institutional plaintiffs. Pomerantz’s BP team included Managing Partner Jeremy A. Lieberman, Senior Counsel Marc I. Gross, and Partner Jennifer Pafiti, among many other contributing attorneys and staff.

ESG Disclosure in the Biden Era

POMERANTZ MONITOR | MARCH APRIL 2021

By Jennifer Pafiti

The Securities and Exchange Commission (“SEC”) requires companies to disclose their most significant risk factors in their filings in order to warn investors of the risks of either purchasing or continuing to own their company’s stock. Such disclosures may also serve as a “safe harbor defense” for public companies in securities litigation arising from their statements to investors, in that predictions, projections and expectations in offerings and other disclosure documents may not be construed as misleading if they contain sufficient cautionary language disclosing specific risks.

Law360 has just published the findings of a review that it, along with analytics provider Intelligize, conducted on changes in companies’ risk disclosures at the dawn of the Biden era. According to their review, at least 97 companies updated the “risk factor” sections of their SEC filings as of February 26 “to reflect President Biden’s arrival in office.”

Law360 and Intelligize found that fossil fuel-energy companies and drug developers are the most common stock issuers updating their risk disclosures to warn investors of potential policy changes that could harm their businesses under a Biden administration. Other industries, they report, have cautioned investors that a rise in corporate taxes could affect their profitability. According to Law360, “Fallout from the coronavirus pandemic has also been a recurring “risk factor.” ... Some banks are now warning investors that policies aimed at relieving borrowers may affect their bottom lines.”

Under the former SEC Chair, Jay Clayton, the SEC adopted more than 90 new rules. Investor advocates and state securities regulators criticized the “principles-based” rules enacted under Clayton for leaving too much to interpretation and providing inadequate guidance as to their scope of and compliance. For example, Regulation Best Interest (Reg B1), prohibits brokers from placing their own interests ahead of their customers, yet does not require brokers to meet the same rigorous “fiduciary standard” that is imposed on investment advisers.

One of the keystones of President Biden’s agenda is his commitment to protecting the environment. He has promised to hold polluters accountable by establishing “an enforcement mechanism to achieve net-zero emissions no later than 2050.” Biden’s ambitious environmental goals may face challenges in the Senate, but he will have some leeway to pursue them via the SEC.

Biden has nominated Gary Gensler, an academic, former investment banker, and former government finance official in the Obama administration, to serve as the SEC’s 33rd chair. During his confirmation hearing on March 2, Gensler told the Senate Banking, Housing and Urban Affairs Committee that he supports more climate risk disclosure, pledging that the SEC will undertake economic analysis and seek public feedback on how to advance it. “There are tens of trillions of investor dollars that are going to be looking for more information about climate risk,” he said, adding that “issuers will benefit from such disclosures.”

SEC Commissioner and Acting Chair, Allison Herren Lee, is strongly critical of policies adopted under Clayton’s tenure. She has called the agency’s failure to require the disclosure of environmental, social, and governance (ESG) related risks such as diversity and climate change “an unsustainable silence” – evoking, for some, Rachel Carson’s seminal 1962 book, Silent Spring, which helped to inspire an environmental movement that led to the creation of the U.S. Environmental Protection Agency. In her September 23, 2020 Statement to the Amendments to Rule 14a-8, Lee wrote, “Climate change, workforce diversity, independent board leadership, and corporate political spending, as well as other ESG-related issues, are increasingly important to investors—and increasingly present on proxy ballots. ... Environmental and social proposals have been ascendant in recent years, making up more than half of all proposals filed in recent seasons.” She criticized Clayton’s SEC for moving to restrain those efforts “just as they are gaining real traction.”

On March 5, SEC Commissioners Hester M. Peirce and Elad L. Roisman – both Republicans – published a joint statement in which they appear to dig in their heels to privilege the status quo. Referring to the recent “steady flow of SEC “climate” statements” they ask:

What does this “enhanced focus” on climate-related matters mean? The short answer is: it’s not yet clear. Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relation twist? Time will tell.

It is certainly likely, though, that the SEC under Biden will scrutinize claims made by investment firms and financial advisors regarding their ESG funds, on the lookout for “greenwashing” attempts to make a fund appear more sustainable or ESG-compliant than it actually is.

Congressional Democrats, meanwhile, have been promoting legislation that would require companies to disclose ESG-related risks for years. Senator Elizabeth Warren’s proposed Climate Risk Disclosure Act of 2019 “would require public companies to disclose more information about their exposure to climate-related risks, which will help investors appropriately assess those risks, accelerate the transition from fossil fuels to cleaner and more sustainable energy sources and reduce the chances of both environmental and financial catastrophe.”

Representative Juan Vargas introduced the ESG Disclosure Simplification Act of 2019 to establish a Sustainable Finance Advisory Committee within the SEC that would “submit to the Commission recommendations about what ESG metrics the Commission should require issuers to disclose.”

Treasury Secretary Janet Yellen, who has called climate change “an existential threat,” intends for her department to play an integral role in fighting it. She is expected to appoint a “climate czar” and to use the Financial Stability Oversight Council to crack down on climate-related financial risks.

On March 10, 2021, the U.S. Department of Labor announced that it would suspend enforcement of Trump- era regulations limiting socially conscious investments by retirement plans while crafting new regulations that “better recognize the important role” of ESG investments in retirement plans.

The Investment Company Institute (“ICI”), which manages over $34 trillion in assets globally, has called upon public companies in the United States to provide ESG disclosure consistent with standards set by the Task Force on Climate-Related Financial Disclosure (TCFD) and Sustainability Accounting Standards Board (SASB).

On March 17, at a virtual conference of the ICI, Acting SEC Chair Lee defined the principal that is “the basis of shareholder democracy: through clear and timely disclosure, we empower investors to hold the companies they own accountable—including accountability on climate and ESG matters.” Expressing concern that “our regulations have not kept up with this new landscape of institutional investor-driven corporate governance,” Lee called for changes to shareholder proxy voting disclosures that would incorporate “soaring demand” for ESG investment strategies.

According to Benjamin D. Stone of Mintz Insights, “Should President-elect Biden successfully institute a regulatory framework for corporate ESG disclosures, investment funds will be well-positioned to deliver trillions of dollars of investment capital into the U.S. economy to meet climate goals.”

Still, the SEC has yet to define ESG or direct companies on exactly which ESG-related risks it wants them to disclose. The United States lags well behind Europe in this regard. The EU Sustainable Finance Disclosure Regulation (2019/2088) comes into force on March 10, 2021. In the United Kingdom, new climate-related disclosure regulations that apply to investment managers in the U.K. are expected to be phased in from 2022.

It remains to be seen whether the United States can catch up.

Pomerantz Submits Amicus Brief to Supreme Court

POMERANTZ MONITOR | MARCH APRIL 2021

By The Editors

In a hotly contested issue before the United States Supreme Court affecting investors’ rights to recoup damages from publicly traded companies as a result of securities fraud, Pomerantz LLP submitted the sole amicus brief on behalf of twenty-seven of the foremost U.S. scholars in the field of evidence. One of the two issues before the High Court in Goldman Sachs Group Inc. et al v. Arkansas Teachers Retirement System, et al. (No. 20-222) squarely affects investors’ ability to pursue claims collectively as a class: whether, in order to rebut the presumption of reliance originated by the Court in the landmark Basic v. Levinson decision, defendants bear the burden of persuasion—as every circuit court to address the issue has held—or whether they bear only the much lower burden of production, as Goldman Sachs argues. The burden of production is easily satisfied by the mere recital of words or the introduction of evidence without actual persuasive effect.

When interpreting statutes, the Supreme Court and the circuit courts sometimes create presumptions to best effectuate congressional intent. That is exactly how the Basic presumption came to be. The Court determined that the congressional policy embodied in the Securities Act of 1934 called for the full and accurate disclosure of information related to securities to promote the integrity of the market and the setting of “just” prices. The Court reasoned that advancing that goal would best be achieved through a presumption of class-wide reliance if plaintiffs show, among other things, that a defendant made material misrepresentations that affected a security’s price.

Pomerantz argues that Federal Rule of Evidence 301, which shifts the burden of production but not that of persuasion, is merely a default rule that, by its own terms, is inapplicable because the substantive law at issue necessarily demands that the defendants actually show, i.e., prove, that the presumption is defeated. It would be palpably unfair – and inconsistent with the reason behind the Supreme Court’s creation of the presumption in the first place – to impose on investors the high burden of satisfying the presumption, only to have defendants overcome it by merely introducing some evidence creating a dispute as to price impact.

“Institutional and retail investors alike have the right to hold those that defraud them accountable,” said Emma Gilmore, the Pomerantz Partner spearheading the effort, “and pursuing their claims as a class has been a critical step in their pursuit of justice.”

Read Pomerantz’s full amicus brief to the Supreme Court at pomlaw.com/AmicusMar2021.

Q&A: Christopher Szechenyi

POMERANTZ MONITOR | MARCH APRIL 2021

By The Editors

Pomerantz’s Director of Investigations Christopher Szechenyi manages a global team of investigators who are devoted to uncovering fraud, misleading statements, and other acts of misrepresentation by corporations and their officers. He and his team have conducted hundreds of witness interviews for the Firm’s securities fraud cases, which produced significant settlements for plaintiffs. Prior to his 20 years of experience as a private investigator, Chris served as a producer for Mike Wallace at 60 Minutes and learned his chops as a fearless, award-winning investigative reporter in Chicago.

Monitor: Can you share your journey from community newspaper reporter to Mike Wallace’s producer at 60 Minutes?

Christopher Szechenyi: My first beat as a newspaper reporter was covering science, medicine and health care. At the Columbia Daily Tribune, I co-wrote a three-part series, called “Public Trust, Private Profits,” about the county hospital’s publicly elected board of trustees, who were feathering their own nests in secret, sending the hospital’s business to their own private companies without any public bids or public knowledge. It led to the resignation of the hospital administrator and an outside company taking over the day-to-day operations of the hospital. After that I became a full-time investigative reporter and editor in Chicago, where I exposed a group of construction companies that were sending their employees sixty stories underground without testing the air for noxious gases, without ventilating the shafts or the giant sewer tunnel they were building, and without equipping the men with ventilators and gas masks. The repeated pattern of safety violations by the same companies led to the deaths of ten people. OSHA fined these companies as little as a dollar for killing a worker. They were never charged criminally. None of this had come to light before. The newspaper series won a national award for investigative reporting and prompted changes on a national level. It also caught the eye of other journalists, including those at the CBS station in Minneapolis. My first story there – based on lawsuits and disciplinary records – revealed that a small group of police officers, nicknamed “thumpers,” had repeatedly beaten citizens in horrific ways. In 1993, I landed an incredible job in Paris as a producer for Mike Wallace on 60 Minutes, one of the best jobs in journalism. Of all the stories, I am most proud of one where I obtained the confidential audits of the United Nations about tens of millions of dollars of waste and fraud at the UN. It took a week to cultivate the source who had the audits and dropped them off with my hotel’s concierge hotel in a brown paper envelope to remain anonymous.

M: What led you from journalism into investigations?

CS: Curiosity is the main motivating factor in both journalism and private investigations. They both consist of uncovering the unknown, finding the truth and exploring a world that we really know little about. From a young age growing up in New York City, my parents and grandparents, who were immigrants from Europe after the war, exposed me to many different cultures, people and places. My family gave me the ability to talk with anyone, and the kind of passion, persistence and empathy one needs to succeed as a journalist and as a private investigator.

During high school, I wanted to follow in the footsteps of Jacques Cousteau as an oceanographer. As a high school senior, I travelled aboard a ship from Woods Hole Oceanographic in Cape Cod to Bermuda aboard one of its research vessels. I traveled across the Indian Ocean, conducting research on ocean currents. That experience made me realize my strength was in translating the complexities of science into news and feature stories. I then made the jump from journalism in 2001 to a boutique law firm in Boston where I served as Director of Investigations. Another new world opened up - this time involving terms like channel stuffing and premature revenue recognition, and the financial frauds at Enron and Worldcom.

M: How did your experience at 60 Minutes prepare you for the work you do now?

CS: Mike Wallace set the pace for being passionate about his work, a characteristic I already shared. But this man, with whom I worked when he was 75 years old, never stopped working. Weekends, morning, noon and night. He loved his job. To succeed at 60 Minutes, it’s all about producing the best stories. You’re only as good as your last story and your next one. So that level of intensity is what I bring to this job as a private investigator every day. I place a high emphasis on productivity and consider each of the attorneys with whom I work to be my Mike Wallace.

The other aspect of working for 60 Minutes that contributes to my work today is the ability to develop contacts on a worldwide basis. Not only have I built a team of 10 outstanding investigators and researchers in the United States – the best in the business – whom I recruit, train, and coach on a daily basis, but I also call on investigators with whom I have built a relationship in London, Geneva, Hong Kong, Munich, Moscow and Mexico City to assist with Pomerantz’s international cases. One of those investigators happens to be Megan Wallace, Mike’s granddaughter.

M: What are you looking for when investigating a company for potential securities fraud violations?

CS: One word: scienter. We are looking for evidence that the individual defendants, usually the CEO and CFO, and senior management, knew about the fraud, directed it or ignored it. To derive that information, each interview we do with lower-level former employees adds a piece to the puzzle. The attorneys take our pieces – the memos we write – and put together the big, complete picture of the puzzle in a narrative.

M: Is there one investigation of which you are particularly proud?

CS: The CEO of Polycom had been fired for misusing the company’s funds, an unusual step for a publicly traded company. We investigated and learned he had his administrative assistant buy fancy Hermès ties for customers, but instead kept them for himself. It wasn’t enough to fire him, however. We also learned he was unfaithful to his wife. So, after thinking about who would really know the details about his financial shenanigans, I thought, “I bet his wife would know.” I called her up one weekend in a fancy ski town, and the first thing she said: “I am his ex-wife, and he is the biggest liar you will ever meet.” I asked her for details about his misspending and she gave me a prelude to what the SEC later charged him with: $80,000 for personal travel and entertainment (his ex- wife told me who charged the company for a trip to Bali, among other places); $10,000 for clothing and accessories; $5,000 for spa gift cards; and $10,000 for tickets to professional baseball and football games he falsely claimed to have attended with clients.

M: What is the biggest misunderstanding that people have about being an investigator?

CS: It’s not about hiding in the trees and taking pictures of cheating spouses, which by the way, I’ve never done. In this practice, it’s all about analyzing the case; figuring out who would be the best potential sources; finding their names, titles and phone numbers; and then calling them to talk in great detail, which requires a private investigator to earn their trust. It takes persistence, patience and the ability to connect with people in every corner of the world and in every industry on earth from mining diamonds to mining data.