Pomerantz Achieves Corporate Governance Reform at Troubled State Street

POMERANTZ MONITOR | JANUARY FEBRUARY 2022

By Daryoush Behbood

State Street Corporation is an American financial services and bank holding company headquartered in Boston, Massachusetts. It is the second-oldest United States bank, with operations worldwide and trillions of dollars of assets under management.

However, over the course of many years, State Street was encumbered with numerous high-profile problems. In 2015, State Street disclosed that for nearly twenty years, it had incorrectly invoiced clients for out-of-pocket expenses (expenses billed as the actual cost State Street was incurring). While the company paid back more than $370 million to customers, its reputation took a substantial hit. In January 2016, the SEC announced that State Street Bank and Trust Company (“SSBT”), a wholly owned subsidiary of State Street, had paid $12 million to settle claims that a senior vice president of SSBT’s public funds group caused State Street to enter into improper lobbying agreements to facilitate SSBT’s ability to obtain custody services contracts with state pension funds. The SEC also alleged that the senior vice president and an outside lawyer for State Street made and facilitated improper political campaign contributions, contrary to SSBT’s Standards of Conduct for employees, for the same purpose.

In April 2016, two former State Street executives were charged with defrauding State Street clients through undisclosed commissions applied to billions of dollars in securities trades. According to the U.S. indictment, the executives and others illegally conspired (from at least February 2010 to September 2011) to add more than $20 million in secret commissions to fixed income and equity trades performed for at least six of State Street’s institutional clients. One executive pled guilty and the other was convicted in a jury trial for conspiracy, securities fraud, and wire fraud. State Street ultimately paid $64.6 million to resolve civil and criminal investigations related to the allegations. Finally, in July 2016, State Street announced that it would pay $530 million to resolve regulatory and class action claims that it misled certain custody clients related to how the company priced indirect foreign exchange trades.

All in all, these issues caused State Street to pay over $1.2 billion in reimbursement and penalties, harming not only the company itself, but State Street’s many shareholders. To vindicate its shareholders’ rights, Pomerantz, on behalf of two of its clients (State Street shareholders) sent a letter to State Street’s Board of Directors demanding that it undertake an independent internal investigation concerning: (i) the overbilling of clients; (ii) the payment of $12 million to settle charges that the company devised a pay-to-play scheme with respect to Ohio pension funds; (iii) undisclosed commissions applied to billions of dollars in securities trades; and (iv) the $530 million settlement with regulators and public pension funds to resolve foreign exchange fraud claims.

As alleged in the complaint that was eventually filed by Pomerantz on behalf of State Street shareholders, despite the demand letter, the company’s then Board of Directors failed to take any meaningful action towards resolving the weaknesses in its corporate governance that led to the numerous issues outlined above. After a three-year investigatory process, however, the plaintiffs and State Street were able to reach a settlement agreement that required the company to implement and maintain a comprehensive collection of corporate governance and internal control reforms. The reforms included the following:

First, State Street’s Board of Directors was required to revise its corporate governance guidelines to specify that it would be explicitly responsible for overseeing management’s assessment of the adequacy and effectiveness of internal controls, ensuring, in no uncertain terms, a compliance oversight function at the Board level. The importance of the Board’s oversight function cannot be overstated. Creating a compliance oversight function at the board level is extremely important because it elevates the compliance function, separate and apart from management. The targeted language added to the Board’s guidelines will remedy the responsibility gap at State Street and help prevent the recurrence of problems that were previously overlooked, such as overbilling and overcharging State Street clients for out-of-pocket expenses.

Second, the settlement required State Street to develop, implement, and assess a “culture training program” specifically for newly hired employees. The culture training program was designed to promote high ethical standards at the company, create awareness of the risks of unethical business conduct not only for individual employees, but for State Street as an institution, and more generally to prevent the recurrence of employee misconduct that caused the company to pay millions of dollars in penalties, fines, and restitution. Finally, the settlement required State Street to maintain a large suite of policies and procedures, thirty-eight in total, on a wide variety of fronts and in potentially high-risk areas, including billing, contracts, anti-fraud policies, marketing, ethics, and client invoicing. The settlement binds the company to keep these policies and procedures in place for three years, which will considerably strengthen State Street’s internal controls, compliance with state and federal laws, promote appropriate business conduct, and force cultural changes that will persist into the future.

Overall, the corporate governance reforms specified within the settlement were designed to reduce the risk of the recurrence of issues such as those alleged within the plaintiffs’ complaint, and they positioned the company to profit from the long-term benefits of strong corporate governance. Considering the substantial benefits provided to State Street and its shareholders via the settlement, Pomerantz’s clients, and all State Street shareholders, expect that the company’s worst days are behind it.

A Pivotal Moment for the PSLRA's Discovery Stay? Not So Fast.

POMERANTZ MONITOR | NOVEMBER DECEMBER 2021

By Louis Ludwig

The Supreme Court’s unanimous 2018 opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund held that (i) state courts have jurisdiction to hear class actions brought under the federal Securities Act of 1933 (the “Securities Act”) and (ii) the Securities Litigation Uniform Standards Act (SLUSA) does not empower defendants to remove class actions alleging only Securities Act claims from state court to federal court. While these resolved previously-disputed matters, Cyan opened the door to another issue of great importance: Does the provision in the Private Securities Litigation Reform Act (PSLRA), which requires that “in any private action arising under” the Securities Act, “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss,” apply to Securities Act cases brought in state court, or is its application limited solely to such cases brought in federal court?

On July 2, 2021, the Supreme Court granted the petition for writ of certiorari in Pivotal Software v. Tran to address precisely this question. Pivotal was named in a federal securities class action relating to alleged misrepresentations made in connection with its IPO. The federal suit against Pivotal was dismissed for failure to state a claim, but plaintiffs in parallel state proceedings then sought discovery from Pivotal, leading the company to seek resolution from the Supreme Court.

The PSLRA, enacted by Congress in 1995, established a “stay of discovery provisions” until after a complaint is sustained over defendants’ motion to dismiss or defendants answer the complaint, whichever comes first. Congress reasoned that “discovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint,” except “in the exceptional circumstance where particularized discovery is necessary to preserve evidence or to prevent undue prejudice to a party.” This broad stay of discovery was supposedly intended to prevent plaintiffs from leveraging the threat of damaging and costly discovery to achieve favorable settlements, especially where a complaint was meritless and unlikely to survive a motion to dismiss.

While the PSLRA’s discovery stay, on its face, applies to “any private action” arising under subchapter 2A of Title 15 of the US Code, which includes the Securities Act, some state trial courts have concluded that the discovery stay is a procedural rule that does not apply to them. Other courts have determined that applying the stay would undermine Cyan’s recognition of state court jurisdiction over the Securities Act. Still other courts have reasoned that SLUSA’s guidance that “a court may stay discovery proceedings in any private action in a State Court” would be superfluous if the PSLRA stay of discovery applied to state court actions. In Cyan’s wake, with more plaintiffs bringing Securities Act claims in state court, the divide has only deepened between these courts and those that interpret the PSLRA’s “any private action” language as requiring them to enforce the discovery stay.

In support of universalizing the PSLRA discovery stay, defendants have argued that state courts are generally more lenient than federal courts in their pleading standards for fraud; that state court judges typically have less experience with securities claims, thus giving rise to increased uncertainty; and that state courts frequently allow shareholders to assert discovery demands before judges have ruled on dismissal motions.

Yet objections to a lack of uniformity between state and federal Securities Act litigation seem more redolent of an invitation to revisit Cyan rather than to focus on the comparatively narrow discovery stay issue. Indeed, the fact that state courts can – and do – decide whether to permit early discovery on a case-by-case basis muddies the claim that state courts are a free-for-all, discovery-wise. Nor is the discovery stay sacrosanct in federal court; to cite one example, in Blitz v. AgFeed, litigated in the Middle District of Tennessee, Pomerantz attorneys successfully moved to lift the stay in order to depose a director who oversaw an investigation into the same accounting misconduct at issue in the lawsuit. Defendants’ post-Cyan cri de coeur elides cases like AgFeed and others where some discretion would make sense: for example, federal securities defendants seeking dismissal routinely point to plaintiffs’ failure to cite damning internal reports as a basis to get rid of the suit. No doubt such defendants are also big fans of the PSLRA discovery stay that prevents plaintiffs from actually obtaining such documents at the pleading stage.

In Pivotal, after the federal action was dismissed, plaintiffs pursued discovery in a parallel securities class action in state court. Pivotal argued, to no avail, that the PSLRA’s discovery stay applied to both the state trial and appellate courts. Pivotal sought review by the Supreme Court, with its petition for certiorari arguing that “[i]t is time for this Court to step in” and suggesting that, absent Supreme Court review, the split among state trial courts was unlikely to be resolved.

On August 26, 2021, just as the Supreme Court was close to hearing arguments in Pivotal, the parties informed the Court that they had “reached an agreement in principle to settle the case ... subject to approval by the Superior Court of California.” When that happens – as seems likely as of this writing – the parties will move for dismissal of the Supreme Court case, leaving the dispute where it was when the Pivotal defendants moved for certiorari, i.e., at square one. Moreover, in the current political climate, it seems unlikely that Congress will enter the securities law fray as it did over 25 years ago via the PSLRA.

Even without a Supreme Court decision mandating that the stay be applied across the board, the much-discussed increase in state court Securities Act filings after Cyan may have been stanched by a less direct tactic favored by issuers. In 2020, the Delaware Supreme Court held, in Salzberg v. Sciabacucchi, that Securities Act forum selection clauses included in companies’ offering documents are facially valid. Unsurprisingly, given the Delaware Supreme Court’s outsized influence on corporate law (itself a by-product of Delaware’s dominance of the corporate incorporation business), state court Securities Act filings have decreased since Salzberg, as companies preemptively divert potential securities suits to federal court.

Assuming that most companies adopt the federal forum provisions as part of the process of going public, the scope of the PSLRA discovery stay may ultimately prove to be a moot point. However, in the event that state court filings increase post-pandemic, or if the holding of Salzberg is somehow limited, then the likely settlement in Pivotal will not prevent another aggrieved defendant from seeking review all over again.

Will ESG Disclosure Rules Force Corporations to Come Clean?

POMERANTZ MONITOR | NOVEMBER DECEMBER 2021

By Elina Rakhlin

The Covid-19 pandemic, with its resultant lockdowns, has inadvertently exposed the extent to which business activity drives greenhouse gas emissions. In 2020 alone, U.S. greenhouse gas emissions experienced the largest one-year decline since at least World War II. But 2020’s emission reductions were in large part due to decreased economic activity resulting from measures put in place to slow the rate of Covid infection, reduced travel, and changes in demand for goods and services. With much of the population now vaccinated and many returning to work in 2021, emissions will likely rise again. Professor Petteri Taalas, Secretary-General of the World Meteorological Organization, said that while “the Covid-19 pandemic is not a solution for climate change … it does provide us with a platform for more sustained and ambitious climate action to reduce emissions to net zero through a complete transformation of our industrial, energy and transport systems.” This environmental call to arms has been echoed by President Biden and his administration, who have put pressure on organizations to address environmental, social, and governance (ESG) related issues. Similarly, the Securities and Exchange Commission (SEC) has made ESG a priority and weighed in to help drive consistency and transparency for public market disclosures.

Some companies, not waiting for the SEC to direct them on which ESG risks should be disclosed, have already marketed themselves as adhering to ESG best practices. According to a September 2020 report from Morningstar, sustainability-focused index fund assets have doubled in the past three years, to more than $250 billion as of mid-2020. In the U.S., sustainable index funds have quadrupled, now representing 20 percent of the total. No doubt the public’s changing attitudes towards diversity, inequity, climate change, and social unrest are driving factors behind institutional investors’ interest in ESG issues. A September 2019 survey conducted by Morgan Stanley’s Institute for Sustainable Investing found that “[m]ore than eight in ten U.S. individual investors now express interest in sustainable investing, while half take part in at least one sustainable investing activity.” It remains to be seen just how many of these so-called sustainable funds and ESG-labeled investment products are misrepresenting themselves to take advantage of the commercialization of ESG issues – a marketing tactic known as greenwashing.

Earlier this year, the SEC formed its first Climate and ESG Task Force within the Division of Enforcement. According to SEC Commissioner and Acting Chair Allison Herren Lee, its purpose is to “work to proactively detect climate and ESG-related misconduct, including identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” On August 25, the Task Force showed its teeth, pressuring managers of ESG-labeled investment funds to demonstrate that they’re being honest with consumers about their ESG-labeled investment products. The Wall Street Journal reported that the SEC and federal prosecutors were investigating DWS Group, an asset management arm of Deutsche Bank, for alleged ESG-related fraud, after its former head of sustainability claimed the firm overstated how much it used sustainable investing criteria to manage its assets. This investigation into DWS may signify the beginning of a larger SEC crackdown on potentially deceptive ESG promises.

In August 2021, InfluenceMap, a London-based nonprofit, announced the results of its analysis of ESG and climate-themed funds, reporting that 55 percent of funds marketed as “low carbon,” “fossil fuel free,” and “green energy” had grossly exaggerated their environmental claims, with more than 70 percent of ESG funds falling short of their goals as well.

In September 2021, SEC Chair Gary Gensler provided a little more insight into the Commission’s ESG requirements. He reiterated the increasing demand from investors to “understand the climate risks, workforces, and cybersecurity risks of the companies whose stock they own or might buy.” Gensler has tasked his staff with reviewing current practices and developing a proposal for climate risk disclosure requirements for the SEC’s consideration. Additionally, the SEC Chair mentioned that the Commission would be pursuing similar disclosure requirements when it comes to human capital and board diversity.

Although it has not yet adopted final ESG disclosure rules, the SEC proposed proxy voting rules that would require funds to clearly disclose their votes on shareholder and management proposals in relation to their ESG claims. The proposed plan would amend Form N-PX, which requires funds to publicly report their proxy voting records annually, to include many new categories established by the SEC that funds could then use to correspond and report their votes on ESG-related topics. The SEC is additionally proposing that institutional investment managers also be subject to section 13(f) reporting requirements on “how [they] voted proxies relating to shareholder advisory votes on executive compensation (or ‘say-on-pay’) matters.” In a September 29 Commission meeting to consider the proposal, Gensler said that the proposed say-on-pay requirements would allow investors to understand and analyze proxy voting information more easily. The proposed rules may have actually left many funds more dazed and confused about disclosure requirements, but this is only the beginning of the SEC’s ESG-related regulations.

On October 5, 2021, Gensler told Congress that the SEC is considering phasing in its anticipated climate requirements, which will require companies to report their greenhouse gas emissions and climate change risk management plans. Still to be determined is whether compliance would vary based on company size and the different types of climate-related disclosures that may be required.

The SEC is expected to propose its new rules soon, possibly requiring companies to publicly disclose climate risks in their annual 10-Ks or other filings. Additional quantitative reporting may be required of greenhouse gas emissions and any financial impacts of climate change, as well as qualitative disclosures on executive management of climate risks and how climate change factors into a company’s business strategy.

It remains to be seen when we can expect final SEC guidance on disclosure requirements, or how they will affect companies going forward. But one thing is certain: the SEC is closely watching ESG-labeled funds and investment products and will hold them accountable for any misrepresentation and deceptive ESG-related practices.

Q&A: Professors Daniel J. Capra and Stephen A. Saltzburg

POMERANTZ MONITOR | NOVEMBER DECEMBER 2021

By the Editors

Do defendants in securities fraud class actions bear the burden of persuasion when seeking to rebut the presumption of reliance originated by the Supreme Court in its landmark decision in Basic, Inc. v. Levinson, or do defendants bear only the lower burden of production? In early 2021, Partner Emma Gilmore led a team of Pomerantz attorneys and twenty-seven of the foremost evidence scholars in drafting an amicus brief in Goldman Sachs Group, Inc. et al v. Arkansas Teachers Retirement System, et al. (No. 20- 222) – the sole brief submitted to the Supreme Court on this hot-button issue. Emma spoke with two of those experts – Daniel J. Capra and Stephen A. Saltzburg – about the SCOTUS decision that sustained their argument.

Monitor: Please share the journey you took to becoming an evidence expert.

Professor Capra: My road to expertise began with learning from the best --- Professor Steve Saltzburg. After that, I was lucky enough to be appointed as a Reporter to the Judicial Conference Advisory Committee on Evidence Rules, where I have received 25 years of on-the-job training.

Professor Saltzburg: There was no trial advocacy or skills training when I was a law student, so I chose upon graduation to clerk for a federal district court instead of a court of appeals. Back then trials were frequent and I was in court with the judge every other day. Hearing lawyers argue evidence issues and speaking to the judge about his rulings got me really interested in Evidence. So when I joined the University of Virginia faculty, I had no difficulty in choosing Evidence as one of my courses. I have been teaching Evidence since 1972.

M: Can you describe what you believe was at stake for the plaintiffs’ bar in the issue you addressed in Goldman Sachs Group?

Profs: The fraud on the market presumption of reliance is essential to the system of private enforcement of securities laws that we have in the United States. Two key things were at stake in the case: (a) Without the presumption, class securities actions might be doomed, given that individual plaintiffs might have to show that they relied on particular statements or omissions. This would have been difficult and expensive, and courts might have found that a class action was not an appropriate vehicle in securities fraud cases since some plaintiffs might not be able to prove reliance; (b) The position of the defendant – that any evidence offered to rebut the presumption would make the presumption disappear – would have meant that the presumption would be rebutted in almost every case, virtually automatically.

We felt that the evidentiary question in this case was critical to maintaining the fraud on the market presumption and the viability of securities laws.

M: What is the biggest takeaway from the Supreme Court’s Goldman ruling?

Profs: By enforcing a stronger presumption, the Court has signaled that it intends to adhere to the fraud on the market presumption that it established in the Basic case. That is an important signal of the Court’s interest in allowing private causes of action to enforce the securities laws. This was somewhat surprising given the Court’s favorable view of commercial entities in a variety of cases.

M: What was the biggest challenge against the argument made in Pomerantz’s amicus brief?

Profs: The Evidence Rule involved – Rule 301 (“[i]n a civil case, unless a federal statute or these rules provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption”) – provides that presumptions governed by the Rule are rebutted by a minimal showing (enough for a reasonable person to find that the contrary fact exists). So it was our task to convince the court that the Rule did not apply. The Rule contains an exception for when a federal statute provides otherwise --- but the fraud on the market presumption is not specifically contained in legislation. Rather it is a presumption established by the Court in Basic to promote Congressional intent. So the best argument against our position was that Rule 301, by its terms, governs because the fraud on the market presumption is not found in a federal statute; and the Court rejected that argument.

M: A majority of the Supreme Court agreed with your arguments. What are your thoughts about the dissenting opinion?

Profs: With respect, we believe the dissent incorrectly diminished the holding and meaning of Basic and its progeny. And as to the Evidence question, the dissent read Rule 301 to cover presumptions in a way that would undermine Congressional intent.

M: The Amicus Brief expressed the opinions of 27 of the brightest legal and scholarly minds, including yourselves. How did the 27 of you coordinate your efforts?

Profs: The group of Evidence scholars in the United States is relatively small. At the stage of our careers, everyone knows everyone. If your work is respected, then others in the field will be willing to rely on it --- and, in the case of an amicus brief, to sign on to it. Most of the experts who signed on did so without any suggestions for change. But several of our colleagues provided very helpful suggestions that we implemented. We are extremely grateful to our colleagues who signed on to the brief --- as well as to our counsel, and to Emma Gilmore, without whom the brief would not have been possible.

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.