Corporate Governance Roundtable

Please join corporate governance professionals from around the globe at Pomerantz’s first European Roundtable.

Pomerantz is pleased to announce that on October 23, 2023, it will host its next Corporate Governance Roundtable in Rome, Italy. This will be the Firm’s first Roundtable in Europe. With offices in New York, Chicago, Los Angeles, Paris, Tel Aviv – and most recently, London – Pomerantz is committed to serving its clients wherever they are based.

Pomerantz is known for presenting remarkable special guest speakers at its Roundtables and this year is no exception. Speaking at Pomerantz’s Roundtable in Rome will be the former British Prime Minister, the Right Honourable Sir Tony Blair.

Sir Tony was born in Edinburgh, Scotland and, after studying law at Oxford University, he practiced law in the U.K. as a Barrister. Sir Tony served as Prime Minister of Great Britain and Northern Ireland from 1997 to 2007, the only Labour leader in the party’s 100-year history to win three consecutive elections. As Prime Minister, Sir Tony helped bring peace to Northern Ireland, securing the historic Good Friday Agreement in 1998. A passionate advocate of an interventionist foreign policy, Sir Tony created the Department for International Development, tripled the UK’s foreign aid to Africa, and introduced landmark legislation to tackle climate change.

Since leaving office, Sir Tony devotes most of his time to helping governments deliver effectively for their people, working for peace in the Middle East, and countering extremism. In 2016, he established the Tony Blair Institute for Global Change, whose global team works in more than 20 countries across four continents to support leaders with strategy, policy and delivery. They contribute fresh analysis, practical policy solutions and embedded support in response to such challenges as Covid-19, the war in Ukraine, the tech revolution and the net-zero transition.

Pomerantz’s Roundtables gather institutional investors from around the world to share knowledge and engage with leading experts in the areas of corporate governance, ESG, regulatory policies, and other issues that affect the value of the funds they represent.

Seating at the Rome Corporate Governance Roundtable is limited. To express interest in this one-day event, kindly email: pomerantzroundtable2023@pomlaw.com

Q&A: Omar Jafri

POMERANTZ MONITOR | JANUARY FEBRUARY 2023

Omar Jafri, a Partner in the Firm’s Chicago office, recently spoke to the Monitor about his securities practice and his pro bono work in criminal justice.

The Monitor: What led you to a career in law?

Omar Jafri: In college, I double majored in Government and Asian History at the University of Texas at Austin, while taking overlapping pre-law courses on the origin and development of the United States Constitution and the structure and powers of the federal government. Studying the Constitution as an undergraduate sparked my interest in the law. I was keenly interested in business and finance, but against corporate malfeasance and the abuse of corporate power. The Enron and WorldCom scandals were in full swing at the time. That’s when I knew I wanted to be a securities lawyer.

M: Why the plaintiffs’ bar instead of defense?

OJ: Principally because it allows me to pursue cases that align with my values and beliefs, but there are other reasons. As master of the complaint, the plaintiff sets the stage for the litigation and can control the narrative. Having worked at a corporate defense firm before joining Pomerantz, I have seen a world of difference between the two sides in terms of day-to-day litigating. As a junior associate in Big Law, I rarely had client contact. As an associate at Pomerantz, I was sometimes the Firm’s main point of contact with the client. The actual litigation experiences on the plaintiffs’-side are also unparalleled. For example, some of my peers and colleagues in Big Law have never argued a federal appeal and never will, because their firm’s Appellate and Supreme Court practice is responsible for handling that aspect. I am on track to have argued, by the end of 2023, nearly half a dozen federal appeals in different Circuits in the last few years alone, and I do not consider myself to be an appellate specialist. This would not be possible without the support of the Firm’s Partners, who allowed me to gain so much litigation experience even as an associate.

M: What about securities fraud litigation continues to motivate you?

OJ: Our practice is unique in that when a case is filed, we barely have more than a theory of what went wrong yet are required to comply with the heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA requires plaintiffs to plead an inference of fraud that is as compelling as an inference of innocence yet simultaneously kneecaps plaintiffs by preventing them from engaging in any discovery until a court concludes that the applicable pleading standard has been met. No other litigant in any other area of law is required to comply with a similarly onerous scheme. With the asymmetry of information that was created by a statute intended to kill securities lawsuits, it requires persistence, creativity and doggedly running down every possible lead to uncover indicia of falsity and scienter. That is true in every case regardless of whether it involves the same subject matter or the same industry or even the same defendants. Every win is a victory against the PSLRA and its corporate apologists.

M: What is your proudest achievement as a securities litigator so far?

OJ: The most satisfying results come in extremely hard cases where, despite the onerous standards of the PSLRA and its built-in disadvantage for investors in securities lawsuits, courts allow the litigation to proceed to discovery, or the litigation results in a significant recovery. For example, in one of our recent cases, defendants’ knowledge of contemporaneous falsity did not initially appear to be strong. Then, days before an amended complaint was due, the defendants unexpectedly filed a new document with the SEC, in which they made a series of admissions that contradicted whatever they had told investors for the last two years. The case literally changed overnight. The district court denied the defendants’ motion to dismiss in large part based on the same post-class period admissions and concurred that the later-emerging admissions demonstrated the falsity of defendants’ prior representations.

M: Please tell us about your pro bono work in criminal justice.

OJ: I have represented criminal defendants pro bono from the time I started practicing law. My first pro bono client was an innocent person wrongfully convicted because his trial attorney failed to put ten unimpeachable alibi witnesses on the stand for reasons that I still cannot fathom. He served ten years in prison before his conviction was reversed by the United States Court of Appeals for the Seventh Circuit for ineffective assistance of counsel. I have continued to represent clients charged with serious crimes in the State of Illinois, pro bono, while at Pomerantz. In one of my recent cases, the client was charged with extremely serious offenses. My co-counsel and I thoroughly investigated the case, shared our findings with the Cook County State’s Attorney’s Office, and convinced the prosecutors both that a mistake had been made and that our client was erroneously overcharged. The client is now expected to plead to a much lesser offense that allows him to remain free, whereas the original charges could potentially have led to decades behind bars. I remain committed to devoting time to pro bono criminal defense. Effective representation is crucial, and there are so many defendants that either cannot afford or do not receive it.

Scheme Liability: Talk is Cheap

POMERANTZ MONITOR | NOVEMBER DECEMBER 2022

By Brian P. O’Connell

The Second Circuit Court of Appeals recently showed that talk is cheap when it comes to the reach of “scheme liability” claims for investors.

Pursuant to the scheme liability subsections of the federal securities laws, plaintiffs may bring claims involving “any device, scheme or artifice to defraud,” and for “engag[ing] in any act, practice, or course of business which operates… as a fraud.”

However, on July 15, 2022, in Securities and Exchange Commission v. Rio Tinto PLC (“Rio Tinto”), the appeals court held that the SEC could not allege a claim against an international mining company for scheme liability based only on its assertion that the mining company made false statements and failed to disclose key information about the company’s acquisition of a coal mine in Mozambique. The court ruled that scheme liability claims required more than merely alleging a false statement or misleading omission.

The facts in Rio Tinto center on the defendants’ delayed acknowledgment of a major impairment of the value of the mine. In 2011, the defendants purchased an exploratory coal mine in Mozambique for $3.7 billion. The purchase price assumed that the mine would produce high quality and large volumes of coal, that the coal could be barged down the Zambezi River, and that the rest could be transported using existing rail infrastructure. However, the defendants soon learned that the coal quality was worse than expected, that the Mozambican government would not allow transportation of coal by barge, and that the rail infrastructure would require a $16 billion upgrade. On May 11, 2012, management from the mine informed company executives in a meeting that the coal mine’s net present value was negative $680 million.

In the months before and after the meeting, the defendants were issuing financial statements and preparing audit papers. The complaint alleged that these documents contained representations about transportation options and the quality and volume of coal reserves. The statements included the company’s 2011 annual report, which valued the mine at the $3.7 billion acquisition price, a half-year 2012 report, bond offerings, and statements made during meetings and investor calls. The SEC alleged that none of the documents disclosed that the mine’s value was impaired. Meanwhile, the company’s in-house valuation team disagreed with the over-$3 billion valuation. In August 2012, the team valued the mine in the range of negative $4.9 billion to negative $300 million. On January 15, 2013, the company’s board approved an 80% impairment, valuing the mine at $611 million. After once again impairing the mine, the company sold the mine in October 2014 for $50 million.

In 2017, the SEC brought an enforcement action under the Securities Exchange Act’s (“Exchange Act”) scheme liability provisions alleging, among other claims, that the company made false statements about coal transportation options and the amount and quality of coal reserves, and the company failed to disclose that the mine’s valuation was impaired. In 2019, the trial court dismissed the scheme liability claims on the grounds that the conduct constituted misstatements and omissions only and was therefore an insufficient basis for scheme liability. In 2005, the U.S. Supreme Court had ruled in Lentell v. Merrill Lynch that misstatements and omissions cannot form the “sole basis” for liability under the scheme subsections.

About one week after the trial court’s decision in Rio Tinto, the Supreme Court released Lorenzo v. SEC, which held that an individual who disseminated a false statement (but did not make it) could be liable under the scheme liability section of the Exchange Act. In Lorenzo, the defendant director of an SEC-registered brokerage firm, Francis Lorenzo, sent two emails to prospective Lorenzo’s boss and described a potential investment in a company that had “confirmed assets” of $10 million. Mr. Lorenzo knew, however, that the company had recently disclosed that its total assets were under $400,000. Lorenzo held that the transmission of emails, or “dissemination,” could sustain a claim under the scheme section of the Exchange Act, which prohibits a “device,” “scheme,” “artifice to defraud,” and/or fraudulent “practice.” Lorenzo thus concluded that the scheme subsections of the Exchange Act can cover misstatements even if the defendant was not a maker of the statement.

Citing Lorenzo, the SEC moved the trial court in Rio Tinto for reconsideration, but the court denied it. On appeal, the Second Circuit held that misstatements and omissions, on their own, cannot support a scheme liability claim under the Exchange Act and affirmed the lower court’s decision dismissing the scheme liability claims. The court noted that the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders limits primary liability under the Exchange Act’s false statement section to the “maker” of a statement, but that scheme liability does not require an allegation that a defendant made a statement.

The court cautioned that expanding the scope of scheme liability would lower the bar for primary liability for securities fraud claims, which requires that a complaint alleging misleading statements specify each statement alleged to be misleading, and the reasons why the statement is misleading. The court warned that “an overreading of Lorenzo might allow private litigants to repackage their misstatements claims as scheme claims to evade pleading requirements imposed on misrepresentation claims.”

The Rio Tinto court concluded that because Lorenzo did not break “the link on which [the court] premised its prior decision,” it would not reverse the trial court’s decision. The appellate court’s analysis was premised on the trial court’s characterization of the scheme liability counts as a collection of misstatements and omissions. The court held that because Lentell withstands Lorenzo and because the dismissal order stated that the complaint alleged misstatements and omissions only, the trial court did not abuse its discretion in declining to reconsider the dismissal of scheme liability claims. The court ruled that under Lorenzo, although misstatements and omissions can form part of scheme liability, an alleged “actionable scheme liability claim requires something beyond misstatements and omissions.”

The court acknowledged, however, the possibility that there are ramifications from the Lorenzo decision that “blur the distinctions” between the misstatements subsections and the scheme liability subsections of the Exchange Act. For example, the court declined to consider whether the corruption of an auditing process or allegations that a corporate officer concealed information from auditors is sufficient for scheme liability under Lorenzo.

The court further noted that overreading Lorenzo could muddle the distinction between primary and secondary liability—as aiding and abetting liability is allowed in SEC actions but not by private plaintiffs. The court cautioned against reviving an implied cause of action against all aiders and abettors, including those who assist in the preparation of a statement.

The ramifications of Lorenzo remain to be fully played out, but this decision foreshadows coming battles over whether concealment claims are “omissions” under the misstatements/omissions subsections of the Exchange Act or more properly viewed as scheme claims under the scheme liability subsections, as well as the judiciary’s fleshing out what constitutes dissemination. On September 2, 2022, the Southern District of New York held in In Re Turquoise Hill Resources Ltd. Securities Litigation that a drafter of a statement who “disseminates” the statement to another who then published the statement did not constitute “dissemination” under Lorenzo. On October 11, 2022, however, the Southern District of New York, in SEC v. Stubos, held that the SEC alleged a scheme liability claim by claiming a defendant engaged in a pump and dump stock promotion. The SEC alleged the defendant concealed his ownership in the company, broke his trades into small blocks to avoid market scrutiny, and directed other traders via encrypted messages to strategically buy stock to inflate the price—without making a false or misleading statement. In doing so, the court cited Rio Tinto language that “dissemination is [just] one example of something extra that makes violation a scheme.”

Expect more decisions setting the parameters of scheme liability in the years to come. Plaintiffs will want to allege scheme claims as including something more than mere statements in future scheme actions.

The Valuation Treadmill

POMERANTZ MONITOR | NOVEMBER DECEMBER 2022

The Valuation Treadmill by Professor James J. Park

Reviewed by Marc I. Gross

This is an abbreviated version of an article to be published in the Securities Regulation Law Journal. Despite the plaintiffs’ securities bar’s success, over the last decades, in recovering billions of dollars for defrauded investors and effecting important corporate governance reforms, corporate securities fraud persists.

The history and current state of “cooking the books” is masterfully explored in The Valuation Treadmill by Professor James J. Park of UCLA Law School. Park blames the persistence of such fraud primarily on corporations’ drive to meet “valuation metrics” – especially quarterly earnings projections – by fudging numbers to report results consistent with such forecasts.

The Frauds

Park analyzes iconic cases of projection-focused frauds, recounting the motivation behind each, the methods used, and the ultimate fallout. These include frauds related to Penn Central’s demise in the 1970’s; Apple’s failed launch of the Lisa computer in the late 1980’s; Xerox’s unsuccessful efforts to keep pace with computer-driven technology in the late 1990’s; Enron’s efforts to monetize energy supply contracts in the early aughts; Citigroup’s sinking from overloaded subprime debt in the late aughts; and GE’s opaque, cobbled-together conglomeration of enterprises, which (by deft skill or sleight of hand) enabled it to generate 10 years of consistent growth, until, abruptly, it did not.

The Obsession with Projections

Park decries analysts’ and investors’ focus on the feedback loop of the “valuation treadmill”:

“[S]ecurities fraud emerged as a significant risk for public companies as investors changed how they valued stocks. As investors adopted modern valuation models and attempted to develop projections of a corporation’s ability to generate earnings into the future, it became more important for public companies to meet market expectations about their short-term performance.”

This focus on the future, Park asserts, has created structural incentives for companies to inflate prospects, which was not historically the case. He lays blame on money managers and outside securities analysts as well as on corporations themselves. The Valuation Treadmill also asserts that executive compensation has become a factor in the pressure to meet quarterly projections. In the 1970’s, CEOs, missioned to maintain stable growth, were compensated primarily in cash. By the aughts, CEOs had morphed into entrepreneurial titans setting the course for expansive growth, with 66% of their compensation in stocks and options.

How They Did It – The Projections/Inflation Toolbox Park

Park identifies several devices management has used to inflate results and meet forecasts, including:

Skewed Unbundling – improperly allocating bundled hardware/software and service contracts in order to maximize short-term revenue recognition and minimize long-term amortizations, as in Xerox and Comverse Technologies.

Round-tripping – entering into contracts to essentially swap revenues.

Reciprocal Timing Transactions – to forestall reporting lower-than-expected results, a company “sells” goods to third parties near the end of a quarter, with the understanding that the company will buy back the goods once the new quarter begins.

Cookie Jar Reserves – manipulating results when times are good by increasing reserves which are expensed against earnings, and then releasing those reserves in less profitable times, thereby “smoothing out” reported results.

Earnings Management – an arguably more sophisticated method of smoothing out reported earnings by which companies sell assets and purchase new revenue-generating businesses when they need to produce additional income for a period. Such buying and selling enables a company to exercise discretion on how much to assign to goodwill and deferrals.

Proposed Solutions

The Valuation Treadmill also proposes several solutions to projections-triggered fraud. Rather than weaning the market from reliance on projections, Park urges that all corporations be compelled not only to provide quarterly projections, but also to disclose the basis for such projections. Doubling down, he further urges that companies be compelled to update their projections, considering significant intra-quarter developments. To address the risk of earnings management, Park also recommends that the SEC develop rules clarifying when companies cross the line into deceit.

A threshold question to Park’s proposals remains: Will mandating quarterly projections continue to skew the focus to “short termism” and risk long-term sustainability? Such short-sightedness accounts for the significant decline in corporate investment in research and development, whose payoff is generally years down the line, and has led to reliance on acquisition of start-ups (only recently raising antitrust monopolization concerns). Several alternatives to Park’s proposals are considered below.

The Business Roundtable Remedy – fewer projections

Park acknowledges, but rejects, the proposal forwarded by Jamie Dimon and Warren Buffet on behalf of the Business Roundtable, that companies be barred from issuing quarterly projections altogether, to enable them to voluntarily manage investor expectations during downturns, while reducing the weight investors assign analyst projections.

The UK Remedy – fewer quarterly reports

Both the Business Roundtable and Park ignore the possibility of reducing short-termism by companies issuing historic results less frequently. Companies listed on the London Stock Exchange fi le financial reports only semi-annually. From 2007-2013, the UK experimented with quarterly reports, but reversed that requirement in 2014. Quarterly reporting maximizes contemporaneous information, but increases the risk of short-termism and securities fraud, which is far less frequent in the UK.

Clawbacks

Another solution not considered by Park would be enhanced enforcement of “clawbacks.” The SEC is empowered to recover compensation paid to executives for conduct underpinning whistleblower complaints. Such clawbacks remain rare, though, and there is no private right of action empowering investors to directly sue for such recompense – investors can only sue derivatively on behalf of a company. Perhaps if executives were held more accountable for the bonuses they pocket from reporting inflated results, they might think twice before “cooking the books” to meet quarterly projections.

Several Questions Raised by Park’s Proposals

Which Projection Factors Should be Disclosed

If disclosure of quarterly forecasts and supporting assumptions are to be mandated, companies will need to beef up internal controls. Myriad prognostications inform forecasts: likely sales, returns, bad debts, currency fluctuations, interest rates, wages, employee turnover, etc. If each contributes to projection calculations, to what degree should each be disclosed? Moreover, is there a risk that increased costs for control-related personnel and procedures will lower profits?

Should Disclosure to Bankers Be Shared

Before reinventing the wheel, it could be helpful to understand what types of forecasts companies routinely provide their lending banks, and to consider compelling their disclosure. On the other hand, having managed a contingency fee law firm for several years, I know that forecasting is more art than science. Executives will be in a structural bind: As salespeople, they need to set goals to motivate personnel and maximize performance; but projections of likely results will need to be tempered when presented to risk-averse investors.

Should Upside Revisions Be Disclosed?

Park’s proposal to impose a duty to update might be a welcome addition to the valuation tool kit. But should that duty be bilateral, i.e., if matters look better than previously projected as the quarter nears an end, should the company be compelled to disclose revised upbeat projections? The pressure to commit fraud might intensify if last-minute sales fail to materialize after such upward adjustments. Market prices tend to be volatile, particularly when companies miss consensus forecasts by even small amounts. A mandatory duty to update projections could have unintended consequences on market prices or management behavior.

Conclusion

The Valuation Treadmill is an invaluable addition to the study of securities fraud trends over the past 50 years, along with ambitious proposals to curtail such misconduct in the future.

Pomerantz Vindicates Defrauded DouYu Investors

POMERANTZ MONITOR | NOVEMBER DECEMBER 2022

By Brian Calandra

On, August 9, 2022, New York State Supreme Court Justice Andrew Borrok preliminarily approved a $15 million global settlement of securities fraud claims against DouYu International Holdings Limited (“DouYu”), simultaneously resolving parallel state and federal court lawsuits arising out of DouYu’s $775 million debut on the Nasdaq in 2019. The final settlement hearing will be on December 1, 2022. Pomerantz represents the federal plaintiffs in the case in the United States District Court for the Southern District of New York.

DouYu (which translates to “fighting fish”) is the largest game-centric live streaming platform in China. The company’s platform operates on PC and mobile apps, and enables individuals to watch, create, or share videos in real time. Users who broadcast content on DouYu’s platform are called “streamers”.

The federal putative class action, filed in 2020, alleged that DouYu’s IPO documents touted the benefits of Chinese tech giant Tencent’s 37% stake in DouYu, referring to Tencent as a “major shareholder and strategic partner,” particularly “in live streaming, advertising and game distribution, which helps reinforce and solidify [DouYu’s] position as a leading game-centric live streaming platform in China.” But shareholders claimed that DouYu failed to mention that Tencent was simultaneously planning to invest more than $1 billion in Kuaishou, one of DouYu’s direct competitors.

According to the complaint, “DouYu’s ability to maintain its ‘deep pool of top streamers’ was, and is, absolutely critical to its success and its efforts to differentiate itself from major competitors.” The company’s offering documents credited DouYu’s large, enthusiastic, and highly engaged user base for attracting and retaining its top streamer pool, stating:

“We believe we are the go-to platform for game-centric live streaming in China . . . Our rich and dynamic content offerings and engaging social media features bolster organic growth of our user base.”

Yet DouYu withheld from its IPO investors that, in fact, many top gamers were departing en masse for competitors. Further, shareholders claimed they were unaware that DouYu’s “lucky draw” gifting feature ran afoul of Chinese gambling regulations, and that one of the site’s most popular streamers — a woman known as “Your Highness Qiao Biluo” — had used video software to disguise her age.

In the months after the IPO, the truth was gradually revealed, as media and analysts reported a decline in DouYu’s revenue, leading DouYu’s share price to plummet 47%.

The settlement is on behalf of all investors who bought DouYu American depositary shares between July 16, 2019, and Jan. 21, 2020, and resolves all claims against IPO underwriters JPMorgan Securities LLC, Morgan Stanley & Co. LLC, BofA Securities Inc. and CMB International Capital Ltd., as well as Cogency Global Inc., DouYu’s U.S. representative for its offering.

Q&A: Chiao Chen

POMERANTZ MONITOR | NOVEMBER DECEMBER 2022

The Editors recently sat down with Chiao Chen, Pomerantz’s Director of Financial Analysis, for a “behind the scenes” look at damages analysis, a critical aspect of securities litigation.

Pomerantz Monitor: Please describe the path that led you to your role with Pomerantz.

Chiao Chen: Having worked in a variety of roles within investment management firms, I was looking to transition to a new environment in which I could utilize my financial experience and expand my expertise. Pomerantz, a leading global securities ligation law firm, was seeking a hands-on financial leader to oversee their damages team. This seemed a natural fit for my abilities and a path to advance my professional development.

PM: What is financial analysis in the context of securities fraud?

CC: Financial analysis in the context of securities fraud is an analysis of data related to securities transactions where fraud is suspected as a cause for loss. Securities fraud usually involves corporations misrepresenting information that investors rely on to make decisions. When companies falsely tout their financial prospects or fail to disclose adverse information to the market, the value of their securities is artificially inflated. When the truth surfaces, the value of those securities plunges and investors suffer. Most, but not all, cases at Pomerantz are litigated on behalf of an entire class of similarly damaged investors. For a class to be certified, attorneys and their clients must demonstrate, among other things, that the class is so numerous that joinder of all members is impracticable, that there are questions of law or fact common to the class, and that the claims or defenses of the Lead Plaintiffs are typical of the claims or defenses of the class. Financial analysis provides a framework to generate empirical evidence per the information available for each individual case.

PM: You are part of Pomerantz’s Case Origination Team. What is your role there?

CC: The attorneys are constantly looking for red flags in the market. If there’s a sudden drop in a stock price on a high volume of trading, they will investigate potential fraud. My team and I work closely with the attorneys. When they identify a case of potential interest, we immediately search our clients’ portfolios to see whether they suffered losses and calculate their potential damages. In the meantime, the attorneys are investigating potential claims in the case. Our proprietary damages software allows us to instantly calculate damages for various scenarios that the attorneys propose.

PM: Describe the role your team plays when Pomerantz competes with other firms to be named Lead Counsel in securities class actions.

CC: Once a securities lawsuit is filed and published, the clock starts ticking. Investors have 60 days within which to move the court to be appointed Lead Plaintiff. All law firms must make their motions on behalf of their clients public. My team reviews all the transactions from competing firms’ submissions and loss summaries. We manually evaluate competing firms’ data to perform an apples-to-apples comparison. We review the transactions to identify a competitive angle for our attorneys to challenge, such as incorrect calculations and/or anything that may suggest the competing firms’ client’s data may be atypical.

PM: It seems like the intersection of mathematics and detective work.

CC: Yes, mathematics and detective work are an apt way to describe this part of the process. Within certain standardized calculations, my team reviews differences and/or errors to give our attorneys an advantage to help challenge competing firms’ clients. We look for miscalculations, transaction prices not within the high/low range for the date, transactions that are outside of the class period and transactions that may suggest an investor was betting against the company.

PM: Your team monitors over $7 trillion in assets to identify clients’ exposure to securities fraud. How do you accomplish that quickly at such a scale?

CC: We monitor our client’s exposure with our proprietary software, JADA2, which uses highly sophisticated technology that has been tailored to our needs. JADA2 can handle a robust data set, based on the parameters we set, so that we may access and analyze our client’s data quickly and efficiently.

PM: With your “behind the scenes” experience, what advice would you give to institutional investors to help them protect their assets from securities fraud?

CC: The best practice for institutional investors is to ensure that a comprehensive, unbiased due diligence is completed prior to investing. As Ronald Reagan said when signing the 1987 Intermediate-Range Nuclear Forces Treaty with Mikhail Gorbachev, “Trust, but verify.”

Pomerantz Opens London Office

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2022

Pomerantz is pleased to announce that on October 1, 2022, it opened its first London office, and that Dr. Daniel Summerfield has joined Pomerantz as Manager of the new office and Business Development Director for the United Kingdom. Jennifer Pafiti, Pomerantz Partner and Head of Client Services, as well as a dually qualified U.K. Solicitor and U.S. attorney, co-heads the London office with Dr. Summerfield.

Dr. Summerfield was formerly the Head of Corporate Affairs of the Universities Superannuation Scheme (USS), the U.K.’s largest private pension fund, having previously served as USS’s Co-Head of Responsible Investment for many years. Dr. Summerfield brings to Pomerantz a wealth of professional experience, particularly with his strong background in addressing ESG, sustainability and corporate governance issues. Learn more about Dr. Summerfield and what he plans to accomplish in his new role in our Q&A with him in this issue.

“Given Pomerantz’s increasing global footprint, it is only natural for our firm to open an office in London to complement our international offices in Paris and Tel Aviv,” says Managing Partner Jeremy A. Lieberman. “We are delighted to welcome Dr. Summerfield to the team. His decade and a half as the Head of Corporate Governance and Corporate Affairs at USS makes him particularly well suited to advising U.K. and European funds regarding securities litigation occurring in the United States and in Europe.”

Pomerantz has long had a meaningful presence in the U.K., representing some of the U.K.’s most influential institutional investors and protecting the rights and assets of British shareholders, including the 400,000- plus members of USS, which served as Lead Plaintiff in the Firm’s historic Petrobras litigation. Ms. Pafiti and Mr. Lieberman have hosted numerous educational events for institutional investors in London over the years, featuring notable guest speakers, such as, Sir Christopher Hoy, Jeremy Paxman, and Boris Johnson. They will continue this tradition on October 26, 2022, at a Pomerantz-hosted investor luncheon in which Mr. Lieberman, Ms. Pafiti and Dr. Summerfield will be joined by special guest speaker, the acclaimed journalist and broadcaster, Andrew Neil.

For decades, Pomerantz has led the way in expanding the rights of, and exploring avenues of recovery for, global investors. The U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd. disrupted decades of legal precedent by barring use of U.S. federal securities laws to recover losses from investments in foreign-traded securities – even where a company dual-lists its stock or sells other securities in the U.S. Investors, including Pomerantz clients, were abruptly left unprotected, with no right of recovery under U.S. law and seemingly no viable recourse in U.S. courts, whenever the exchange on which their damaged shares traded was outside U.S. borders.

Before the ink on the Morrison decision was dry, Pomerantz attorneys were hard at work developing novel legal theories to overcome the roadblocks it imposed. In the first successful workaround to Morrison, Pomerantz pursued ground-breaking individual lawsuits for institutional investors to recover losses in BP plc’s London-traded common stock and NYSE-traded American Depository Shares (ADS) following the company’s 2010 Gulf of Mexico oil spill.

During the course of the BP litigation, Pomerantz secured ground-breaking rulings that paved the way for 125+ global institutional investors to pursue their claims, marking the first time, post-Morrison, that both U.S. and foreign investors, pursuing foreign claims seeking recovery for losses in a foreign company’s foreign-traded securities, did so in a U.S. court. In the process, the Firm secured the right of investors with U.S. federal law claims concerning BP’s U.S.-traded ADS to simultaneously pursue English common law claims concerning their London-traded ordinary shares in a U.S. court. In early 2021, after nine years of hard-fought, landmark litigation, Pomerantz resolved lawsuits pursued on behalf of its nearly three dozen institutional investor clients for a confidential, favorable monetary settlement.

Pomerantz’s London office is located in Central Court, in the heart of the legal profession’s Chancery Lane. Formerly the headquarters of the London Patent Office, Central Court boasts a galleried reading room, glass domed roof, and balconied walkways on cast iron columns. Built from 1899–1902, it was designed by Sir John Taylor, whose best-known works include the Vestibule and Central Hall with staircase of the National Gallery in London.

Jennifer Pafiti and Dr. Daniel Summerfield look forward to servicing the needs of U.K. and European investors from Pomerantz’s London office.

The Inconvenient Case of Forum Non Conveniens

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2022

By Dean P. Ferrogari

On April 20, 2010, the explosion and subsequent sinking of the oil drilling rig, Deepwater Horizon, resulted in the death of 11 workers and approximately five million gallons of oil pouring into the Gulf of Mexico – now commonly known as the worst accidental oil spill in U.S. history. This industrial disaster had devastating ramifications for both the oceanic environment and the investors in BP plc (“BP”), a majority owner of the sunken oil well. In the wake of the spill, and in rapid succession, the price of BP’s ordinary shares, as well as its American Depository Shares (“ADS”) plunged a shocking 50%. These drastic decreases in share price were the result of revelations coming to market; revelations that disclosed the truth behind BP’s misleading statements regarding its commitment to safety and its ability to effectively deal with large oil spills.

The BP litigation took to task the 2010 U.S. Supreme Court ruling in Morrison v. Nat’l Australia Bank Ltd., which shook the international investment community by prohibiting the use of U.S. federal securities laws to recover losses from investments in foreign-traded securities. Consequentially, the Supreme Court’s holding in Morrison left investors who trade on foreign exchanges, outside the purview of American borders, with no rights or recourse to recover their losses under U.S. law. Pomerantz was the chief architect in successfully overcoming the Morrison hurdles and securing the rights of defrauded investors, both foreign and domestic.

Pomerantz’s BP litigation is the first instance in which the hurdles presented by Morrison were successfully navigated. Absent the cutting-edge precedent established in this litigation, BP investors would have been limited to pursuing U.S. federal securities law claims in U.S. courts to recover loss[1]es in BP’s ADS, as Morrison barred the use of those same laws to recover losses from BP’s ordinary shares traded on the London Stock Exchange. Throughout the litigation, BP attempted to rely on Morrison as a mechanism to have the cases dismissed. If the court agreed that such dismissal was warranted, it would have enabled BP to litigate the claims in England, where courts apply rules that harshly disfavor investor rights when compared to U.S. courts.

In 2013, Pomerantz survived BP’s first motion to dismiss. The court, located in the Southern District of Texas, was persuaded by Pomerantz to apply English common law and held that the investors, who were U.S.-based pension funds, had sufficient ties to the United States that warranted adjudication of the litigation domestically, rather than in a U.K. courtroom. Here, the Texas Court rejected BP’s arguments that the Dormant Commerce Clause of the U.S. Constitution and the forum non conveniens doctrine warranted dismissal in deference to U.K. courts. Forum non conveniens is an equitable doctrine that permits courts to decline jurisdiction if the moving party establishes that the convenience of the parties and the interests of justice would be better facilitated in another forum. The court’s analysis on a motion to dismiss for forum non conveniens proceeds in two stages. First, the court must decide whether an alternative forum is adequate and available. If the court concludes that such a forum exists, the court must weigh the private interests of the litigants and the public interest in having the case heard in each forum.

Here, Pomerantz was able to overcome BP’s arguments that the Texas court was an inconvenient forum and that the case should be litigated in England, which would have required the case’s dismissal. BP argued for the court to dismiss our domestic investors’ claims under the doctrine of forum non conveniens. In doing so, BP asserted that England was an adequate alternative forum and that both the private and public interest factors favored dismissal. When successfully disputing these assertions, Pomerantz contended that an English court would be an inadequate alternative because it would be unable to adjudicate all of the domestic investors’ claims. Moreover, Pomerantz established that the private interest factors did not weigh in favor of dismissal. Notably, the court was capable of applying English law, which shares strong similarities to the U.S. legal system due to a common heritage. The court also agreed with Pomerantz that the public interest factors weighed in favor of retaining the domestic investors’ English law claims in U.S. court. Most importantly, the court agreed that the controversy at issue – the worst accidental oil spill in U.S. history – was unquestionably a local interest to Texas courts. The oil spill prompting this litigation occurred only 50 miles off the coast of Louisiana, a state, like the presiding Texas court, with federal district courts under the jurisdiction of the U.S. Court of Appeals for the Fifth Circuit. The Texas court’s application of English common law nullified the barriers presented by the Morrison holding. In surviving BP’s first motion to dismiss, Pomerantz provided U.S. institutional investors the unique ability to pursue not only the U.S. traded ADS losses, but the opportunity to pursue damages for their BP ordinary shares trading on a foreign exchange.

In 2014, Pomerantz overcame BP’s second motion to dismiss, this time securing the same rights for foreign institutional investors by again defeating BP’s forum non conveniens argument. Defendants argued that the foreign investors’ claims should be dismissed in favor of adjudication in U.K. courts. The structure of the English legal system provides restrictions on contingent fee litigation and imposes a loser-pays regime on legal fees. The application of such a regime would have threatened the viability of our foreign clients’ cases to proceed, if at all, due to the significant risks and costs contingent litigation imposes on plaintiffs. Pomerantz, however, successfully secured the litigation’s position in U.S. court, trumping BP’s arguments that the claims of the foreign investors had a stronger nexus to England.

Pomerantz prevailed on the court’s forum non conveniens analysis, which determined that England was not a more convenient venue for the foreign investors asserting claims against both foreign and American defendants. First, the court determined that England was an available and adequate venue for the foreign investors’ claims, presenting significant obstacles that Pomerantz successfully overcame. Second, the court determined how much deference to accord the foreign plaintiffs’ choice of forum. Although there was a multitude of precedent standing for the notion that a foreign plaintiff’s choice of forum is entitled to less deference when compared to a domestic plaintiff’s choice, Pomerantz was able to establish a legitimate connection between the foreign investors’ English common law claims and this multi-district litigation. Establishing the connection allowed our foreign investors to receive the same deference previously afforded to the domestic investors in the first motion to dismiss. Finally, the court determined that our foreign investors’ claims would not be dismissed and adjudicated in U.K. court. Here, the court weighed the substantial deference accorded to the investors’ choice of forum against the private and public interest factors when determining transfer did not heavily weigh in favor of dismissal. Pomerantz successfully persuaded the court to decline BP’s forum non conveniens arguments, survived the motion to dismiss, and enabled the foreign investors to pursue their English common law fraud claims in U.S. court, where investor rights were advantageous. The decisions secured by Pomerantz in BP broke new ground, enabling the very first time, post-Morrison, that U.S. and foreign investors, pursuing foreign claims seeking recovery for losses in a foreign company’s foreign-traded securities, did so in a U.S. court.

Pomerantz crafted and successfully applied novel legal theories that opened the gates for investors who trade on foreign exchanges – effectively setting a new precedent to be used by defrauded investors in the years to come.

Pomerantz LLP Achieves Significant Victory for Damaged Deutsche Bank AG Investors

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2022

By The Editors

In a significant victory for damaged Deutsche Bank AG investors, the Bank has agreed to pay nearly $26.3 million to end a proposed class action against it on behalf of investors who acquired Deutsche Bank stock between March 14, 2017, and May 12, 2020. Pomerantz is sole lead counsel representing the putative class of plaintiffs in the litigation. The recovery represents approximately 49.4% of the likely recoverable damages in this case, which is well above the median recovery of 1.8% of estimated damages for all securities class actions settled in 2021. Plaintiffs have moved the court for approval of the settlement.

The complaint, filed in 2020, alleges that Deutsche Bank made materially false and misleading statements about its anti-money-laundering (“AML”) deficiencies and did not properly monitor customers it considered high risk, such as financier and accused sex offender Jeffrey Epstein. For example, defendants repeatedly assured investors that Deutsche Bank had “developed effective procedures for assessing clients (Know Your Customer or KYC) and a process for accepting new clients in order to facilitate comprehensive compliance,” and insisted that “[o]ur KYC procedures start with intensive checks before accepting a client and continue in the form of regular reviews.” Defendants also claimed Deutsche Bank’s “robust and strict” KYC program “includes strict identification requirements, name screening procedures and the ongoing monitoring and regular review of all existing business relationships,” with “[s]pecial safeguards . . . implemented for... politically exposed persons [“PEPs”] ...”

In truth, however, far from implementing a “robust and strict” KYC program with “special safeguards” for PEPs, defendants repeatedly exempted high-net-worth individuals and PEPs from any meaningful due diligence, enabling their criminal activities through the use of the Bank’s facilities. For example, Deutsche Bank continued “business as usual” with Jeffrey Epstein even after learning that 40 underage girls had come forward with testimony that he had sexually assaulted them. Deutsche Bank’s former CEOs also on[1]boarded, retained, and serviced Russian oligarchs and other clients reportedly engaged in criminal activities, including terrorism.

In making its case, Pomerantz received statements from eleven confidential witnesses, including multiple internal auditors.

In 2020, the media began to cover Deutsche Bank’s internal problems, including news of a harshly critical Federal Reserve report on the bank’s AML and control issues, a $150 million fine from New York State’s financial regulator for AML misdeeds, and its Epstein relationship. According to a Bloomberg news article on July 16, 2020, Deutsche Bank, in a July 7 message to staff, stated that adding Epstein as a client in 2013 “was a critical mistake and should never have happened.” In response to these disclosures, Deutsche Bank’s stock price dropped, wiping out millions of dollars in market capitalization.

According to Partner Emma Gilmore, who leads the litigation, “We are very pleased with the result achieved in this matter. The extraordinary 50% recovery the Firm achieved on behalf of Deutsche Bank’s investors should be a wakeup call for all corporations who choose to conduct business with unsavory characters. As a woman prosecuting the case against Deutsche Bank, this victory is all the more rewarding.”

Additional Pomerantz attorneys litigating this case are Jeremy A. Lieberman, Dolgora Dorzhieva, and Villi Shteyn. The case is Karimi et al. v. Deutsche Bank AG et al., No. 1:22-cv-02854, in the U.S. District Court for the Southern District of New York.

SEC Proposes Amendment to Rule Governing Shareholder Proposals

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2022

By Jonathan D. Park

On July 13, 2022, the U.S. Securities and Exchange Commission (the “SEC”) proposed amendments to the rule governing the process for including shareholder proposals in a company’s proxy statement (the “Proposed Rule”). If adopted, the Proposed Rule will limit the ability of companies to exclude shareholder proposals from proxy statements.

Shareholders’ ability to make proposals to be included in a company’s proxy materials and voted on by all shareholders is an important means of engagement between shareholders and public companies. Rule 14a-8, promulgated by the SEC pursuant to the Securities Exchange Act of 1934, requires reporting companies subject to federal proxy rules to include shareholder proposals in their proxy statements, subject to certain requirements. The rule permits companies to exclude shareholder proposals from proxy statements on thirteen substantive grounds. The Proposed Rule would amend three of those grounds: (1) the substantial implementation exclusion, (2) the duplication exclusion, and (3) the resubmission exclusion.

The Proposed Rule aims to provide clarity to all stakeholders concerning when shareholder proposals may be excluded from proxy statements. Further, it will narrow the grounds on which shareholder proposals may be excluded, thus permitting greater shareholder engagement with management.

Of the three provisions addressed by the Proposed Rule, the substantial implementation exclusion is the most frequently invoked by company “no-action requests” concerning shareholder proposals. Disagreements between a company and a shareholder as to whether a proposal must be included in a proxy statement is often resolved by the SEC staff in response to company requests for the Commission to issue a “no-action letter” stating that it would take no action against the company if it excluded the shareholder proposal. Of the no-action requests received by the SEC during the 2019, 2020, and 2021 proxy seasons, 39% invoked the substantial implementation exclusion. By contrast, the duplication exclusion and the resubmission exclusion were invoked in 5% and 1%, respectively, of no-action requests.

The Substantial Implementation Exclusion

Rule 14a-8(i)(10) currently permits companies to exclude shareholder proposals that “the company has already substantially implemented.” The Proposed Rule would permit companies to exclude a shareholder proposal if “the company has already implemented the essential elements of the proposal” (emphasis added).

The SEC staff’s interpretation of the existing rule—that is, whether a proposal has already been “substantially implemented”—calls for consideration of whether the company’s “policies, practices and procedures compare favorably with the guidelines of the proposal” as well as whether the company has addressed the proposal’s underlying concerns and essential objectives.

Shareholders report that this has led to debates regarding the “essential purpose” of a proposal, and that companies have excluded proposals that addressed similar subject matter as existing company procedures even where the proposal set forth a materially different action. For instance, Exxon Mobil sought to exclude a shareholder proposal calling for the company to state whether and how it planned to reduce its carbon footprint in alignment with the Paris Climate Accords. Exxon argued that the proposal was excludable because, among other things, it had already reported information concerning its approach to climate change. It did not, however, report if it intended to align its business with the Paris Climate Accords or state how it intended to accomplish that goal. Nevertheless, the SEC staff agreed with Exxon, finding that Exxon’s disclosures “compared favorably” with the shareholder proposal and, therefore, that Exxon had already “substantially implemented” the proposal.

Under the Proposed Rule, it appears that this proposal would not be excludable under the substantial implementation exclusion because its “essential element”— that the company state if and how it intends to align its business with the Paris Climate Accords—is distinct from a company’s reporting about its general approach to climate change. The SEC stated that the Proposed Rule is expected to promote certainty because a proposal’s “essential elements” are likely easier to define, and less subject to debate, than its “essential purpose.” Therefore, all stakeholders would have greater certainty as to whether a proposal may be excluded under the substantial implementation exclusion.

Shareholder proponents are likely to have greater success avoiding exclusion on this basis if they develop proposals that include specific and identifiable essential elements that are distinct from the company’s current practices. This is illustrated by SEC commentary discussing the Proposed Rule. The SEC addressed, as an example, the fact that historically its staff had permitted companies to exclude proposals to adopt a bylaw permitting an unlimited number of shareholders who collectively have owned 3% of the company’s outstanding common stock for 3 years to nominate up to 25% of the company’s directors, where the company’s bylaws permitted a group of up to 20 shareholders to aggregate their holdings to meet such a threshold. The SEC explained: “Under the proposed amendment, because the ability of an unlimited number of shareholders to aggregate their shareholdings to form a nominating group generally would be an essential element of the proposal, exclusion would not be appropriate.”

The Duplication Exclusion

Rule 14a-8(i)(11) currently permits companies to exclude a shareholder proposal that “substantially duplicates another proposal previously submitted by another proponent that will be included in the company’s proxy materials for the same meeting.”

The Proposed Rule would provide that a proposal “substantially duplicates” another proposal if it “addresses substantially the same subject matter and seeks the same objective by the same means.”

Under the existing standard, the SEC has focused on whether proposals share a “principal thrust” or focus. The SEC stated that this framework can be difficult to apply in a consistent and predictable manner because there are often several ways to determine a proposal’s principal thrust. By contrast, the Proposed Rule sets forth a more precise standard for the duplication exclusion that the SEC expects it can more easily apply consistently.

The proposed amendment to the duplication exclusion is also narrower than the existing standard, so proposals are less likely to be excludable on this basis. As a result, it is more likely that shareholders will face the option of voting on multiple proposals concerning the same or similar topic at the same shareholder meeting. The SEC noted that this may cause shareholder confusion and could lead to difficulties if multiple proposals, perhaps with overlapping or even conflicting objectives, are approved at the same meeting. Nevertheless, the SEC stated that shareholder consideration of similar proposals may increase the likelihood that proposals that align closely with shareholder objectives will be implemented.

Because the duplication exclusion operates in favor of the earlier-submitted proposal, narrowing the exclusion will reduce the incentive for a shareholder to rush to submit a proposal quickly to avoid exclusion on this basis. It will also lessen the likelihood that a shareholder will be able to block proposals from other shareholders concerning the same topic.

The Resubmission Exclusion

Rule 14a-8(i)(12) currently permits companies to exclude a shareholder proposal that “addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years” and that was voted on at least once in the last three years and did not receive shareholder support above a certain threshold.

Observers may recall that in 2020, the SEC increased the thresholds applicable to the resubmission exclusion. Specifically, the Commission adopted a new rule providing that the resubmission exclusion applied where a proposal was included in the company’s proxy materials within the preceding five years, was voted on within the preceding three years, and the most recent vote was: (1) less than 5% of votes cast, if the proposal was previously voted on once (up from 3%); (2) less than 15% of votes cast, if the proposal was previously voted on twice (up from 6%); and (3) less than 25% of votes cast, if the proposal was previously voted on three times or more (up from 10%).

As a result of increasing these thresholds, more shareholder proposals became vulnerable to exclusion on this basis. Some shareholders noted that this could prevent or delay shareholder consideration of proposals on emerging issues that may have received little support when first introduced. Moreover, because the current resubmission exclusion applies broadly to proposals with “substantially the same subject matter,” it can prevent shareholders from refining their proposals and seeking a vote in a subsequent year.

Under the Proposed Rule, the resubmission exclusion would apply where a proposal “addresses the same subject matter and seeks the same objective by the same means” as an earlier proposal. This is narrower than the existing rule. First, the exclusion would apply only where a proposal addresses the “same” subject matter, not just “substantially the same” subject matter. Second, it would apply only if a proposal “seeks the same objective” as an earlier proposal. Thus, a shareholder proposal concerning a given subject would not block a later proposal on the same topic if the two proposals sought different objectives. Third, the exclusion would apply only if the proposal uses the “same means” as an earlier proposal.

Therefore, if the resubmission exclusion is amended as proposed, shareholder proposals are less likely to be excludable on this basis.

Conclusion

 The Proposed Rule is likely to increase shareholders’ ability to have their proposals included in proxy materials and voted upon by other shareholders. Major institutional investors have already expressed support for the Proposed Rule in comments submitted to the SEC.

The deadline for public comments expired on September 12, 2022. The SEC is expected to announce a final rule in the near future. Alternatively— though less likely—the SEC may take no further action (allowing the current rules to remain in place) or may issue a revised proposed rule for further comment.

Q&A: Dr. Daniel Summerfield

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2022

Partner Jennifer Pafiti recently interviewed Dr. Daniel Summerfield, Pomerantz’s new Business Development Director for the United Kingdom and Co-Manager of the Firm’s London office.

Jennifer Pafiti: Please describe the path that led you to your new role with Pomerantz.

Daniel Summerfield: I have worked with institutional investors in a variety of roles and in various markets over the years and believe that pension funds can and should be a force for good. For that to happen, trustees of pension funds should utilize the means available to them to effect the changes that will ensure the long-term performance of their funds and the companies in which they invest. Those means include litigation. Joining Pomerantz, a firm that not only fights to protect investors, but also serves as an advocate for good corporate governance, seemed like the next logical step in my career.

JP: What are the most significant differences between securities litigation in the U.S. and U.K.?

DS: Securities litigation in the U.K. remains quite challenging when compared to the U.S., Germany, the Netherlands and Australia. The U.K. is catching up, but slowly. In the last decade, the English courts have taken steps to address class actions in a much more favorable way and we’ve seen some civil society groups utilize class actions in cases against companies such as Shell.

JP: What is the appetite of U.K. institutional investors for pursuing securities litigation?

DS: There has been a seismic shift in that regard, at least in the context of the relatively slow changes that take place in the U.K. market compared to the U.S. Fiduciaries are beginning to sit up and take note of the critical role of lead plaintiff. I would argue that, until recently, institutional investors in the U.K. viewed class action securities litigation as merely a way of seeking financial compensation. With the continued amplification of ESG concerns, active engagement in litigation is also being viewed as a way to bring about corporate governance reforms which otherwise would not have been achieved. When USS, even as a relatively conservative pension scheme, stepped forward to serve as lead plaintiff in the Petrobras case, it demonstrated to others that it is not such an onerous responsibility when you have the right law firm as a partner.

JP: You mentioned ESG issues, an area in which you have deep experience. Can you give an example? DS: I have been engaged with regulators, policy makers and pension funds around the globe to bring about governance changes, for example, in getting the concept of Responsible Investment into the mainstream thinking and practices of pension funds as well as introducing market reforms in areas such as hedge fund governance. And I have been involved beyond the traditional staple of engagement tactics. In 2005, USS, collectively with U.S., Australian and European funds, successfully sued Rupert Murdoch’s News Corp in Delaware Chancery Court. The suit alleged that News Corp defrauded investors by refusing them the right to vote on an extension of a poison pill provision, as it had promised it would do. The company had claimed that it did not need to honor its promise to shareholders because the board had the right to change the poison pill policy. This was a significant win for shareholder rights and for corporate governance reform, and it has been frequently cited since.

JP: What is the most important lesson you learned from leading USS through their role as lead plaintiff in its historic $3 billion Petrobras litigation?

DS: I would cite three important lessons learned. First, the paramount importance of good recordkeeping. We could not have achieved what we did had we not had those records in place. Second, the importance of choosing a law firm with the experience, expertise, and patience to help you navigate the challenging path that a complex case like Petrobras presents. And third, I would say, is the importance of resilience. We took the role of lead plaintiff seriously and did not waiver in our responsibility to represent our members and the class. And neither did Pomerantz. All the parties remained resolute in terms of what we wanted to see as an outcome. We achieved it together.

JP: Why should it matter to institutional investors in the U.K. that Pomerantz is now local in London?

DS: While Pomerantz began as a U.S. law firm, it has grown to be a leading global firm in a globalized marketplace. As Jeremy Lieberman has said, ‘where can you say a trade takes place today when it is placed online on one side of the world, transmitted over satellites, and executed on an exchange on a different continent?’ Pomerantz pursues securities litigation wherever in the world the need arises, and the jurisdiction supports. What we can now do as a law firm operating in London is to ensure that U.K. investors and pension funds have a full breadth of understanding of what is going on in the U.S. and the world, and work closely with them, guiding them through the decision-making process regarding specific cases in which they have exposure.

JP: How do you see securities litigation evolving in the U.K.?

DS: It’s about making it more mainstream. Securities litigation is still relatively obscure in the UK, misunderstood by many and taken up by a few. I think where we need to get to, and what I think the next stage in this process is, is to ensure that securities litigation is seen as part of part of the stable of tools that are available to investors rather than as an exception to the rule.

JP: If there was one thing you want institutional investors to know about securities fraud, what would it be?

DS: The sky is not going to fall in just because you are involved in this process. Pursuing securities litigation does not mean that you will automatically lose influence or contact with a company. In a sense, it is par for the course, particularly in the U.S. Securities litigation is also not just about backward-looking financial redress. As I mentioned before, it is also about future-proofing the companies in which we invest and sometimes acting as a deterrent to that company and others who might be tempted to follow in their steps. The changes that we can bring about through class actions can have a very positive, long-lasting outcome.

California’s Statutory Efforts to Achieve Board Diversity

POMERANTZ MONITOR | JULY AUGUST 2022

By Lauren Molinaro

Women—Black and Latina women in particular—remain vastly underrepresented in corporate boardrooms. While studies repeatedly show that an increase in board diversity leads to better business outcomes, progress has been frustratingly slow: As of 2020, women account for around 20% of corporate board rooms, and only 5% of CEOs are women. People of color represent only around 15% of directors on Fortune 500 boards. A lack of diversity at the board level affects corporate governance, as the board establishes a corporation’s vision and mission. Research has shown that diversity of thought and perspective leads to better investment returns, better business strategies, and stronger organizations overall. Companies with diverse boards may have profits 43% higher than those that do not, and compared to individual decision makers, diverse teams make better decisions 87% of the time. In recent years, state lawmakers have increasingly focused on improving workplace diversity through legislation that encourages or requires diversity on corporate boards.

A number of state laws require corporations to disclose the total number of directors on their board and total number of female directors and/or individuals from “underrepresented communities” in their Annual Reports. These “show or tell” laws are built to withstand legal challenges by requiring transparency rather than mandating specific quotas. Only two states—Washington and California— have enacted laws mandating the number of women and individuals from “underrepresented communities” on the boards of directors of publicly traded corporations based in their respective states. The futures of such mandate laws remain up in the air following a pair of recent legal defeats in California state courts.

In 2018, California lawmakers enacted SB 826, requiring publicly held companies with executive offices in California to include minimum numbers of women on their boards of directors by the close of 2019, no matter where they are incorporated. The California Secretary of State has the authority to impose fines up to $300,000 per violation for noncompliance.

In 2020, lawmakers approved a similar bill, AB 979, requiring covered California corporations to have a minimum of one director from an underrepresented community by the close of 2021. The bill defines a director from an “underrepresented community” as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native; or who selfidentifies as gay, lesbian, bisexual or transgender.” Additional requirements apply by the close of 2022, depending on the size of the board.

In April and May, two California state judges struck down the laws in separate decisions, finding SB 826 and AB 979 to violate the Equal Protection Clause of the California Constitution.

To withstand constitutional scrutiny, a statute employing racial and other classifications must be narrowly tailored to address a specifically identified harm that the state has a compelling interest in remediating. In California, if the state wants to create classifications based on sex, it must also have a compelling interest and its action must be necessary to achieve that purpose. In striking down the laws, both courts found SB 826 and AB 979 unconstitutional on their faces. Both laws unconstitutionally treated similarly situated individuals–qualified potential corporate board members–differently based on their racial, sexual orientation, and gender identity groups, requiring that a specific number of board seats be reserved for members of a group, thereby excluding members of other groups from those seats.

The courts found the state failed to show a compelling government interest by failing to produce evidence of specific past discrimination in board selection. In doing so, the courts stressed that while rectifying specific and intentional discrimination can be a compelling government interest, remedying generalized, non-specific allegations of discrimination is not. For example, the state cited only statistics about the number of women on corporate boards as compared to men but failed to identify specific instances of women being discriminated against by a specific corporation in the corporation’s board process. The courts also concluded that the state failed to show the statute was narrowly tailored to address the perceived discrimination in light of available gender-neutral alternatives, such as amending existing anti-discrimination laws or enacting a new anti-discrimination law focusing on the board selection process. The courts did not criticize the goal of the California legislature in enacting the statute, but the specific means it had taken to serve the state’s commitment to equal treatment and opportunity.

It now appears that California’s statutory efforts to achieve board diversity through mandated seats for women and individuals from underrepresented communities is on hold. Despite the setback, public pressure on companies to advance board diversity remains strong. At least a dozen other states have drafted or passed board diversity legislation. As mentioned above, the vast majority of these laws differ drastically from California’s in that they do not mandate a specific number of individuals on any corporate board, but merely require disclosure, which the California state courts’ rulings seemingly deem permissible. While a similar law in Washington requires a specific percentage of female board members, no penalties are given for compliance failures. The California rulings also have no effect on a rule adopted by Nasdaq and approved by the Securities and Exchange Commission (SEC) requiring most companies listed on the Nasdaq to have at least two self-identified “diverse” board members or explain in writing why they do not. Nasdaq has emphasized that the rule establishes a disclosure-based framework, and not a mandate or quota. Nasdaq’s Listing Rules currently face a challenge in the Fifth Circuit, where the Court will review the SEC’s approval of these rules and determine whether they violate the Equal Protection Clause of the U.S. Constitution.

However, legislation is only one of the driving forces behind diversifying corporate boardrooms. As shareholders elect the board, institutional shareholders have shown a willingness to utilize their leverage to apply pressure to influence companies to improve diversity at the board level. A lack of diversity at the board level is considered a risk for institutional investors. Stakeholders may act against companies lacking board diversity by voting against or withholding votes from existing directors or otherwise exerting public pressure. Institutional investors have made bold public statements on their commitments to pressure companies to increase board diversity and be more transparent on their current diversity practices. Large investors like Blackrock, State Street, and Vanguard have publicly expressed a desire to see corporate boards diversify their ranks and have advocated for board diversity through their proxy voting policies.

Concurrently, shareholder groups, employees, and consumers have also been challenging the lack of diversity on corporate boards. Amid escalating battles over diversity, activist shareholders are demanding change. Shareholder derivative lawsuits have recently begun targeting major public and private companies. Alleging that boards have breached their fiduciary duties in creating an “old boys’ club” corporate culture, these activist shareholder lawsuits unequivocally focus on the board’s apparent disinterest in promoting diversity. Through litigation and subsequent settlements, companies have been forced to overhaul their policies, procedures, and oversight functions as well as change the composition of their boards.

Even if legislation to diversify boardrooms remains in question, investors may wield their power and influence to continue to pressure companies to make progress. Investors may emphasize that companies that fail to address this important issue do so at their own peril. In response, companies may choose to adopt corporate governance codes or strategic plans to diversify, such as engaging in outreach to non-traditional avenues of board recruitment, for example. While efforts to diversify boards are long overdue, the gains being made, however slow, are bound to have a positive impact on company culture, corporate performance, and shareholder value.

Delaware to Expand Liability Protections to Senior Officers

POMERANTZ MONITOR | JULY AUGUST 2022

By Gustavo F. Bruckner and Carolyn Fontana

On June 14, 2022, the Delaware Legislature passed legislation that would allow Delaware corporations to adopt exculpation clauses limiting or eliminating the monetary liability of certain officers of corporations. If approved by Delaware Governor John Carney, the proposed changes to the Delaware General Corporation Law (DGCL) would expand liability protections to officers that are similar to those currently granted to directors. This proposed expansion has caused concern in some corners that the amendment will encourage bad behavior by company officers who will now have a shield protecting them.

Under Delaware law, directors and officers owe certain fiduciary duties to their corporations and stockholders, including duties of care and loyalty. Section 102(b)(7) of the DGCL authorizes Delaware corporations to include in their certificates of incorporation “[a] provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director,” otherwise known as an exculpatory clause. Under current law, such exculpatory clauses cannot eliminate or limit the liability of a director for any breach of the duty of loyalty, for any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payment of dividends or unlawful stock repurchases, or where a director receives an improper personal benefit.

These liability protections for breaches of the duty of loyalty and the duty of care given to directors are not currently afforded to officers. Rather, officers currently face potential personal liability for both duty of care and duty of loyalty claims. Duty of care claims can include, for example, alleged disclosure violations. Duty of loyalty claims, meanwhile, often occur when a director profits at the expense of the corporation.

If the proposed changes were enacted, the liability shield for senior officers would expand, thus eliminating or limiting their personal liability in stockholder actions seeking damages for alleged duty of care breaches, but not breaches of the duty of loyalty. The senior officers covered by the new changes are chief executive officers, presidents, chief financial, operating, and legal officers, controllers, treasurers, and chief accounting officers, as well as any other persons identified as “named executive officers” in the corporation’s most recent SEC filings. These senior officers would remain at risk for derivative suits for loyalty breaches pursued in the company’s name and for the company’s benefit.

These proposed changes arose due to criticism over the difference in liability faced by directors and officers. That is, stockholder plaintiffs have increasingly asserted breach of fiduciary duty claims against officers rather than directors, despite officers and directors owing the same fiduciary duties of loyalty. As a result of these claims, Delaware courts have denied motions to dismiss brought by officers, while granting those same motions with respect to the company’s directors.

Proponents of the amendment include firms representing corporations whose officers may now be protected with this liability shield. These firms further argue that these officer duty of care claims are merely new litigation tactics by shareholder plaintiffs’ lawyers to garner potentially lucrative fee awards in cases where these proponents believe any damages case should be dismissed.

Plaintiffs firms have voiced strong opposition to these proposed changes, arguing that they are at best unwarranted. In addition to their lack of necessity, they argue that the changes also needlessly exculpate a range of careless or reckless behavior for which an officer should face potential liability. Without the risk of facing potential liability, senior officers lack a personal motive to act with due care, undermining their crucial role as gatekeepers for the company by preventing corporate misconduct from occurring under their watch.

The changes have also been criticized as creating a solution for a problem that does not exist. More specifically, opponents argue that the drafters conflate the necessary protections for directors with those for officers, as directors face problems with potential liability that officers of the corporation do not face. This can be seen when looking at the origins of director protections, which were expanded in the 1980s following the Delaware Supreme Court’s 1986 decision in Smith v. Van Gorkom. Van Gorkom identified two problems created by holding directors personally liable for negligence: (1) decreasing the pool of qualified people willing to serve as directors of Delaware corporations out of fear of personal liability for corporate actions, and (2) drastically increasing the cost of director and officer liability insurance. To prevent these problems, Delaware enacted strong director liability protections.

Delaware, as the state of incorporation of most corporations in the United States, maintains some of the strongest liability protections in the country, although states like New York have strong director liability protections.

Later, in 2009, the Delaware Supreme Court clarified the duties of officers in Gantler v. Stephens, explaining that officers owe the same fiduciary duties as directors, but do not have comparable exculpatory clauses to protect them from personal liability. This distinction comes from the fact that officers do not face the same problems as certain directors when it comes to personal liability. That is, the changes put in place after Van Gorkom were created to allow independent directors who are not employees of the company to serve on the board of that company without any concern of potential liability for breaches of their duty of care. Officers, on the other hand, don’t have this problem because they lack independence and are actively involved in the day-to-day operations of the corporation.

In addition to the issues regarding differences between officers and directors, opponents of the proposed expansion of liability protections raise the question of why officers can be liable in some situations but not others. For example, a CEO of a corporation making millions of dollars a year could, conceivably, be potentially liable to a customer if they acted negligently and injured that customer. At the same time, if these proposed changes go through, that same CEO would not be liable for acting grossly negligently with respect to stockholders in connection with a sale of company assets.

Moreover, opponents argue, claims of gross negligence are already rare, with only a few cases in recent years permitting a duty of care claim to move forward against a corporate officer, and those cases involved unique situations in which the plaintiffs had the burden to prove their claims. So, the argument that officer duty of care claims are merely litigation tactics for getting higher fee awards is unfounded, they contend, as the claims are few and those which have survived a motion to dismiss have been properly pleaded by stockholder plaintiffs trying to remedy bad business behavior.

These proposed changes, if approved by Governor Carney during the current legislative session, will present significant challenges for shareholder plaintiffs trying to sue officers for allegedly careless behavior. Meanwhile, the changes could also save companies from having to defend claims that they believe have no merit and thus should not warrant damages. Now that the legislation has passed both the Delaware Senate and General Assembly, there is pressure on the Governor to sign it this year, before the legislative session ends. Bills left on the table unsigned when a session concludes must start the process anew.

Pomerantz Achieves $20 Million Settlement Over Allegedly Bad iPhone Update

POMERANTZ MONITOR | JULY AUGUST 2022

By The Editors

On May 3, 2022, after six years of hard-fought litigation, Pomerantz and co-counsel achieved a significant victory on behalf of consumers by securing a $20 million settlement, pending final approval of the court, in a consumer class action against Apple, Inc., on behalf of iPhone owners. The motion to settle, filed in U.S. District Court for the Eastern District of New York and unopposed by Apple, would entitle the class members to a recovery of between $15 to $150 per device owned, depending on how many class members file claims. The named plaintiffs consider this a successful result, as the secondary market price of the phones, according to Apple, is not more than that.

In October 2020, Pomerantz successfully fought to have the court certify two classes of iPhone users: All individuals and entities in New York (Class One) or New Jersey (Class Two) who currently own or have owned an iPhone 4S that was updated to any version of iOS 9 from any version of iOS 7 or iOS 8.

Then, in February 2021, Plaintiffs defeated Apple’s Rule 23(f) Petition seeking permission from the U.S. Court of Appeals for the Second Circuit to appeal the district court’s class certification decision.

Plaintiffs alleged that Apple misrepresented iOS 9 by telling consumers that the software update would enhance the performance of their devices, when this was not in fact the case. After the update, Plaintiffs’ devices slowed down significantly. According to Plaintiffs’ Amended Complaint:

The update significantly slowed down their iPhones and interfered with the normal usage of the device, leaving Plaintiffs with a difficult choice: use a slow and buggy device that disrupts everyday life or spend hundreds of dollars to buy a new phone. Apple explicitly represented to the public that iOS 9 is compatible with and supports the iPhone 4s. This is also obvious from the fact that Apple made the software available for the iPhone 4s, but not for older versions of the iPhone.

Discovery spanned four years and included over 15 depositions, the review of over 48,000 documents – totaling over 539,000 pages – and the submission of expert reports totaling over 770 pages.

“This case involved the application of sophisticated legal issues to a highly complex technological consumer product,” said Pomerantz Partner Michael Grunfeld, who led the litigation. “We are pleased that we were able to achieve this favorable result for the Class by prevailing at every stage of the litigation before reaching this settlement near the close of discovery in the merits phase of the litigation.”

Pomerantz's 2022 Corporate Governance Roundtable

POMERANTZ MONITOR | JULY AUGUST 2022

By Kaylan Perez

“Pomerantz delivered an outstanding roundtable with experts presenting on a variety of corporate governance topics. I really appreciated the opportunity to meet fiduciaries and compare viewpoints.”

Megan Peitzmeier, Senior Staff Attorney, Colorado PERA

On June 14, Pomerantz hosted its 2022 Corporate Governance Roundtable in the Waldorf Astoria Hotel in Beverly Hills, California. The Firm’s Roundtables provide institutional investors from around the globe the opportunity to discuss topics that affect the value of the funds they represent and network with peers in an informal, educational setting.

This year, around 100 attendees traveled to the Roundtable from across the United States, the United Kingdom, France, Italy, and Israel. The theme was the collective power to make change through ESG (environmental, social, and governance), corporate culture and board diversity. Presenters were international experts in the fields of corporate governance, securities litigation, fiduciary duty, ESG priorities, forced arbitration, and board diversity.

According to Pomerantz Partner Jennifer Pafiti, who organized the event, “After having to reschedule numerous times over the past two years due to varying COVID and travel restrictions, the Roundtable coalesced as a highly energized day during which general counsel and corporate governance professionals from some of the largest financial houses around the globe finally had the opportunity to attend in person. Peers came together to learn best practices, with a particular focus on ESG issues, and to share ideas that can really add value to their funds. It was certainly worth the wait!”

Special guest speaker, President Bill Clinton, was interviewed by Pomerantz’s Managing Partner, Jeremy Lieberman, on President Clinton’s time in office, geopolitical issues, and the current global economy.

The panels covered topics of critical importance to the institutional investing community, including “Inside the Boardroom.” The speakers on this panel inspired a lively discussion on how best to engage to address diversity, equity and inclusion (DEI), the conclusion of which was that DEI in the boardroom still has a long way to go.

“Covid-19 and the Litigation Pandemic” addressed ways in which the pandemic has triggered new corporate misconduct, and described cases that are directly derived from companies making misstatements to investors specifically concerning COVID-19.

The “Corporate Governance Developments” panelists engendered vibrant Megan Peitzmeier, Senior Staff Attorney, Colorado PERA “debate among the Roundtable attendees as they explored the global trends in corporate governance and the emerging issues governance professionals will face in the coming year.

Forced arbitration and its negative implications for institutional investors was discussed during one session. The panel of lawyers reported on the Council of Institutional Investors’ and Colorado Public Employees’ Retirement Association’s historic decision to intervene in the Johnson & Johnson action to protect shareholders’ rights against the business community’s push for forced arbitration.

Robert Jackson, Jr., a former Commissioner of the U.S. Securities and Exchange Commission, spoke on “Fiduciary Duty and ESG Priorities in 2022.” The discussion highlighted the limitations of the SEC to deter bad governance in companies, leaving the responsibility to institutional investors to incorporate high standards of ESG performance into their investment analysis and decision-making.

Counsel to a $1.6-trillion European asset management company presented “Securities Litigation Update: Engagement & Litigation.” This session explored institutional investors’ attitudes towards litigation, engagement and other tools used to hold corporations accountable.

At the event’s dinner, attendees heard from the most decorated WNBA player in history, Candace Parker. Candace shared her inspirational journey and achievements and described how she balances a career as a professional athlete with being a full-time mother and businesswoman.

In keeping with the Firm’s continued commitment to provide educational platforms for institutional investors, and in response to the phenomenal feedback from this year’s event, Pomerantz looks forward to hosting the next Roundtable.

“The Roundtable was the perfect size, setting and agenda to ensure that I maximized my time out of the office and completely committed to understanding the corporate governance landscape through the U.S. legal lens. The mix of case studies, frameworks, state, and international perspectives was genuinely insightful to understand the practical crossroads between business, ESG, and law. Each individual session was high quality in its own right, but it was the sum of the parts that left a lasting impression on me.”

Amy D’Eugenio, Director of Business and Client Development for Federated Hermes EOS

If you or your team are interested in attending the next Roundtable event, please register your interest at: PomerantzRoundtable@pomlaw.com.

We extend a hearty thank-you to all our panelists and attendees for making the Roundtable such a success – from all the team at Pomerantz.

Q&A: Tamar A. Weinrib

POMERANTZ MONITOR | JULY AUGUST 2022

By The Editors

Pomerantz Partner Tamar Weinrib’s expert, innovative lawyering has secured court decisions in favor of investors that will form the bedrock of securities litigation for decades to come.

MONITOR: What led you to a career in law?

Tamar Weinrib: From an early age I gravitated toward subjects that foretold a path to a legal career. One of my favorite high school subjects was Talmud. The Talmud is a compilation of oral Jewish laws that are annotated with intricate Rabbinic commentary and discussion covering wide ranging topics. It is without a doubt the first true education I received on legal argument and its foundation in ethics, logic and creativity. Studying the back and forth between Rabbis who held very divergent views on the same topic, the reasoning that led each of them to their views, and the arguments they crafted to persuade others, intrigued me. Though the Talmud dates back centuries, it very much resembles the way that a contemporary lawyer’s mind works. That early study gave me deep respect for legal thought.

The Talmud exemplifies how Jewish law is a living and breathing entity, open to discussion, interpretation, argument, and refinement depending on the circumstances. It may seem like a strange apples-to-oranges comparison, but the same can be said for securities law. The way one applies the law changes significantly depending on the circumstances and facts of each case. No two cases are alike. Circumstances matter, and the facts matter. There is creativity involved in the way that you consider those elements and the right way to apply the law.

M: You mention creativity. How much does that play a role in your practice?

TW: Though I mentioned an early start in my journey toward the legal profession, in college I majored in advertising and minored in art history. To be a successful lawyer, and particularly a litigator, it’s important to have both strong creative and persuasive writing skills, and also to stand in a courtroom and convince your “audience” to see your point of view. Majoring in advertising was solid training in advocacy and oral presentation. Successful advertising involves convincing a consumer to see your product the way you want them to see your product. To be an effective litigator, you have to be able to convince a judge to see the case the way that you want them to see the case.

M: What about the law continues to motivate you?

TW: I am constantly learning. Not just because the securities laws and relevant case law are continuously evolving, but also because each case requires an education into how each defendant company’s industry works. When I led our seminal case against Barclays regarding its “dark pool,” I had to immediately learn about the intricacies of sophisticated, opaque trading platforms that I had never before encountered. We hired a wonderful expert on dark pools to work on the case with us, but there was a lot of self-education. The litigation process itself – research, investigation, reading documents in discovery, asking questions in depositions – all collectively provide a thorough education. It is critical when bringing cases like this to fully understand the underlying industry. I have brought numerous cases against pharmaceutical companies as well. There’s a very intricate FDA approval and clinical testing process before a drug can come to market. So when the underlying claim concerns what a drug company said about the safety or efficacy of its product and how the product was faring during various phases of clinical testing, or, post approval, how it was faring in the market and whether there were reports of serious adverse events – you need to be deeply knowledgeable not just about how the FDA approval process works, but for each case, how the particular drug at issue works.

M: How much of that education occurs before a case is filed?

TW: At Pomerantz, we very carefully investigate our cases before we bring them. So there is a significant amount of research that occurs before the filing of a complaint. We only pursue cases we believe have merit and can only make that determination through “education.” Then, as the case proceeds and we get into discovery, that unpeels the layers of the onion much further.

M: Are there specific challenges to being a woman in law?

TW: What I viewed as challenges when I first started out, I now view as advantages. Especially earlier in my career, I’d walk into a deposition knowing that, given my age and gender, an older male sitting across the table at first glance would have certain expectations and underestimate me. I thrived in challenging those expectations and proving them wrong, and I think that is to my advantage. People don’t always expect a young female attorney to be assertive, to stand her ground or present her case with strength, and it gives me great pleasure to catch them off guard. There can be challenges specific to being a female attorney. But you have a choice – you can see them as challenges, or you can see them as opportunities to prove people wrong and blaze a path that people do not expect you to blaze.

Pomerantz Secures Major Victory for Investors in Case Against Deutsche Bank

POMERANTZ MONITOR | MAY JUNE 2022

By Emma Gilmore

“This case has been particularly meaningful to me, given the misconduct at issue — Deutsche Bank’s lending and servicing of Jeffrey Epstein’s accounts — despite knowledge that he sexually abused at least 40 girls.” — Partner Emma Gilmore

Pomerantz clinched a significant victory for investors in a securities fraud class action brought against Deutsche Bank for its false and misleading representations about the Bank’s Know Your Customer procedures—an important aspect of the Bank’s anti-money-laundering processes. On May 18, 2022, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York denied in large part defendants’ motion to dismiss all claims in Karimi v. Deutsche Bank AG, in which Pomerantz serves as sole Lead Counsel.

The complaint alleges that during the relevant Class Period, Deutsche Bank and several of its executives, including its CEO, made materially false and misleading statements about its anti-money-laundering (“AML”) deficiencies and failed to properly monitor or gave exemptions to customers it considered high risk, such as financier and accused sex offender, Jeffrey Epstein. For example, defendants repeatedly assured investors that Deutsche Bank had “developed effective procedures for assessing clients (Know Your Customer or KYC) and a process for accepting new clients in order to facilitate comprehensive compliance,” and insisted that “[o]ur KYC procedures start with intensive checks before accepting a client and continue in the form of regular reviews.” Defendants also claimed Deutsche Bank’s “robust and strict” KYC program “includes strict identification requirements, name screening procedures and the ongoing monitoring and regular review of all existing business relationships,” with “[s]pecial safeguards… implemented for…politically exposed persons.”

In truth, however, far from implementing a “robust and strict” KYC program with “special safeguards” for politically exposed persons (“PEPs”), during the Class Period, defendants repeatedly exempted high-net-worth individuals and PEPs—including unsavory figures like Jeffrey Epstein and individuals sponsoring terrorism—from any meaningful due diligence, enabling their criminal activities through the use of the Bank’s facilities. That practice commenced with Deutsche Bank’s former CEOs onboarding, retaining and servicing Russian oligarchs and PEPs reportedly engaged in criminal activities.

For example, despite widespread coverage of Epstein’s child sex trafficking and abuse, Deutsche Bank’s executives onboarded Epstein as a client in 2013, enabling his criminal activities to not only continue, but also to flourish. In addition to opening and servicing wealth-management accounts for Epstein, Deutsche Bank also provided loans to Epstein and his businesses. Epstein was onboarded based on the lucrative business he would generate for the bank, with Deutsche Bank estimating “flows of $100-300 [million] overtime [SIC] (possibly more) w/ revenue of $2-4 million annually over time….” Despite knowing that by 2011, “40 underage girls had come forward with testimony of Epstein sexually assaulting them,” Deutsche Bank remained “comfortable with things continuing” with Epstein, “not[ing] a number of sizable deals recently.” One of several confidential witnesses with knowledge of Deutsche Bank’s KYC processes explained that, after Epstein was onboarded, decisions about whether to continue keeping him as a client were repeatedly escalated, including to Deutsche Bank’s Reputational Risk Committee and members of Deutsche Bank’s Executive Committee for the Bank’s Global Wealth Management. Despite these warnings, Deutsche Bank repeatedly approved retaining and servicing Epstein. From the time of Epstein’s onboarding, the relationship was classified by Deutsche Bank as “high-risk” and therefore should have been subject to enhanced due diligence. Instead, in a sordid twist of irony, the Bank designated Epstein an “Honorary PEP.”

Defendants made a number of arguments that Pomerantz defeated. For example, defendants argued that Deutsche Bank’s representations to investors about their Know Your Customer procedures were aspirational and immaterial and that, in any event, the investing public was provided with more than enough information to understand the state of Deutsche Bank’s AML and KYC processes (the so called “truth-on-the-market” defense). Pomerantz successfully countered that defendants’ representations were material to investors because, by exempting PEPs and other high-risk individuals from any meaningful KYC procedures, the risk to the Bank’s reputation and the risks of criminal and civil liability were significantly heightened. The materiality of defendants’ statements was also demonstrated by defendants’ repeated discussion of these topics throughout the Class Period. Pomerantz successfully defeated defendants’ “truth-on-the-market” argument that investors knew Deutsche Bank’s AML procedures were not always effective, explaining that such defense on this record was intensely fact-specific and improperly raised at the motion to dismiss stage, particularly given Deutsche Bank’s affirmative representations of compliance made throughout the Class Period.

Judge Rakoff set a trial date for November 2022.

Partner Emma Gilmore, who leads the litigation, said, in response to Judge Rakoff’s decision, “This case has been particularly meaningful to me, given the misconduct at issue – Deutsche Bank’s lending and servicing of Jeffrey Epstein’s accounts – despite knowledge that he sexually abused at least 40 girls.”

Pomerantz Achieves Victory for Defrauded Chicago Bridge & Iron Investors

POMERANTZ MONITOR | MAY JUNE 2022

By Joshua B. Silverman

In a victory for investors, Pomerantz, as counsel for two of the three court-appointed class representatives, achieved a $44 million settlement in a securities fraud class action against Chicago Bridge & Iron Co., N.V. (“CBI”) and its former Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. The Honorable Lorna G. Schofield of the United States District Court for the Southern District of New York granted preliminary approval of the settlement on March 30, 2022 and set the final approval hearing for July 25, 2022.

CBI is an energy services company specializing in the engineering, procurement and construction of energy plants and related facilities. In 2013, CBI entered the nuclear fabrication business by acquiring The Shaw Group for $3.3 billion. The crown jewel of the acquisition was Shaw’s nuclear construction unit, which was part of a consortium building the first new nuclear plants in the United States in decades, two at a Georgia facility called Vogtle and two at the V.C. Summer facility in South Carolina. CBI and its CEO claimed to have conducted thorough due diligence prior to the acquisition and to have gained a clear understanding of the status of the nuclear projects.

Between October 2013 and January 2015, CBI and its executives made several positive but false statements about the progress of the nuclear projects, hid adverse information about schedule delays and cost overruns, and claimed in periodic reports filed with the Securities and Exchange Commission that there were no indicators of impairment despite significant internal red flags indicating that the nuclear projects were unlikely to ever yield the profits that the company had modeled. They also misrepresented CBI’s ability to recover for unapproved change orders (“UCOs”)—massive but disputed invoices for expenses stemming from design changes. Although the electric utilities that owned the nuclear projects and CBI’s consortium partner refused to reimburse CBI for the UCOs, CBI nonetheless told investors that payment was probable and booked them as revenue.

In mid-2014, institutional analyst firm Vertical Research and short seller Prescience Point each put out negative reports about CBI’s nuclear construction business. By early 2015, it was clear to CBI (and increasingly to investors) that the nuclear construction business was a disaster. CBI began to negotiate a “quit claim” deal with its consortium partner, Westinghouse, to essentially walk away from the nuclear construction projects, stemming losses but receiving virtually nothing for the business it had paid billions for just two years earlier. In October 2015, CBI announced that it would transfer the nuclear construction business to Westinghouse for only a true up of expenses incurred during the transition.

Early motion practice wins established a momentum that carried plaintiffs to trial. First, plaintiffs defeated defendants’ attempt to transfer the lawsuit to the Southern District of Texas, where CBI would enjoy a “home court” advantage. Then, plaintiffs defeated defendants’ motions to dismiss.

Years of discovery developed strong evidence that defendants had concealed adverse information about the nuclear projects from investors. Pomerantz and other plaintiffs’ counsel reviewed over 9 million pages of documents and took approximately 30 depositions. They uncovered evidence that CBI had manipulated its financial reporting by mixing the nuclear construction business with other profitable businesses into a single reporting unit to hide deterioration and avoid a write-down, that both the owners and Westinghouse had rejected CBI’s view that the contracts required reimbursement of UCOs, and that CBI internally did not expect to be paid on many items booked as revenue for several years, if ever.

In addition to uncovering strong factual evidence, plaintiffs also put together a world-class slate of expert witnesses on the topics of market efficiency, damages/loss causation, accounting, and materiality. These experts were particularly crucial at class certification, where both sides’ economic experts testified during an eleven-hour hearing before the Special Master appointed by the Court, the Honorable Shira Scheindlin (Ret.). Pomerantz played a key role, cross-examining defendants’ expert and exposing the weaknesses in her price impact analysis. The Special Master ruled in a 107-page Report & Recommendation that certification should be granted, which the District Court adopted. After full briefing, the United States Court of Appeals declined to consider an appeal of that ruling.

Unbowed, and despite the considerable evidentiary record amassed by plaintiffs, defendants moved for summary judgment on all claims. After full briefing, the district court denied that motion and set the case for trial in February 2022.

Trial always involves risks, and this one more so than others. Defendants had won a jury trial of similar claims in Texas state court against a hedge fund that opted out of the class action. Although Pomerantz believed that its case did not suffer from the flaws that sunk the Texas case, the Texas trial showed that the risk of an adverse verdict was substantial. Against these risks, the class action plaintiffs had limited upside to proceeding to trial. The corporate defendant and its parent had both declared bankruptcy, and the individual defendants did not have sufficient resources to satisfy a large jury award. While Pomerantz and other plaintiffs’ counsel retained bankruptcy counsel to make sure that bankruptcy releases did not bar class claims, the bankruptcy effectively meant that recovery was limited to a rapidly eroding insurance stack.

Acknowledging the risks that both sides faced at trial, the parties decided to take a final run at mediation before the Honorable Layn R. Phillips (Ret.). Ultimately, both sides accepted a mediator’s proposal to settle the case for $44 million, an excellent recovery under the circumstances. Despite the bankruptcy, Pomerantz’s perseverance resulted in a class recovery that was significantly higher than the median for comparable class actions.

A Case for Statistical Evidence in Insider Trading Claims

POMERANTZ MONITOR | MAY JUNE 2022

By Dolgora Dorzhieva

Insider trading is tough to prove, and it can take years to gather enough evidence to successfully prosecute it. Preet Bharara, the former U.S. Attorney for the Southern District of New York, has called insider trading, undertaken by company insiders and hedge funds, “rampant.” The SEC has developed data analytics tools to aid the investigation of insider trading cases with statistical evidence. However, in SEC v. Clark and Wright, the court rejected the SEC’s statistical evidence as “just a matter of speculation.” On occasion, evidence of insider trading is used to determine whether scienter exists in Rule 10b-5 or securities fraud cases. This article will describe the value of statistical evidence and explain what steps plaintiffs’ lawyers can take to leverage such evidence in prosecuting insider trading claims.

What is Insider Trading?

Insider trading involves trading in a public company’s stock by someone who has material nonpublic information (“MNPI”) about that stock. MNPI is data relating to a company that has not been made public but would have an impact on its share price when made public. Insider trading is often carried out by a group of people rather than by an individual acting alone. Frequently, the person who receives inside information from within an organization (“a tipper”) does not trade on that information, but rather passes information on to others (“tippees”), who ultimately trade based on that information. This type of insider trading is illegal because insiders cannot “misappropriate” information for their own benefit.

Investors may be deterred from participating in the market if they know that others are trading on nonpublic information. However, insider trading violations are difficult both to prosecute and to prove. Often, defendants in insider trading cases will deny their awareness of MNPI at the time of a securities trade, or defendants will claim that their reason for trading was completely unrelated to the information in their possession. Because insider trading involves secret information and communications, it is rare to find a smoking gun proving that a trader was tipped and by whom (i.e., what they knew, when they knew it, and how they found out). Therefore, the government and the plaintiffs’ bar often rely––at least initially––on circumstantial evidence to draw the strong inference that the defendant was aware of MNPI and used that information for personal profit when trading.

SEC v. Clark and Wright and the SEC’s Data Analytics Tools

To aid the investigation of insider trading cases, the SEC has developed numerous data analytics tools for analyzing massive amounts of data to identify suspicious trading, such as improbably successful trading across different securities over time. In SEC v. Clark and Wright, the SEC argued that the trades in question were suspicious because they had “an improbable success rate.” The SEC alleged that Christopher Clark and his brother-in-law, William Wright, the former controller for CEB, Inc., engaged in insider trading in advance of CEB’s acquisition. Based on the information tipped by Wright, Clark allegedly purchased highly speculative, out-of-the money call options. The SEC further alleged that, after the public announcement of the acquisition of CEB for $2.6 billion, Clark liquidated his CEB options and made a profit of over $240,000. The cornerstone of the SEC’s case was “suspicious trading”: Clark and his son purchased CEB’s highly risky options before the merger announcement after Clark maxed out his family’s credit line, took out a loan on his car and liquidated his wife’s IRA account to finance these trades. According to the SEC, Clark and his son “were the only investors in the entire world willing to buy such risky options” and accounted for 100% of the buy-side volume on the days in question. The SEC took the position that Clark’s too-good-to-be-true trades, combined with the fact that Clark borrowed money to make the trades, spent ample time with Wright, and traded after communicating with Wright, clearly pointed to insider trading. Instead of initially presenting testimony or other direct evidence, which is hard to obtain at the outset of insider trading cases, the SEC’s case largely hinged on its statistical surveillance tools’ identification of the trades as “highly suspicious.

Wright settled with the SEC in October 2021. Clark proceeded to trial. Courts have repeatedly held that evidence of suspicious trading that coincides with communications between the alleged tippee and tipper should go to the jury. Judge Hilton, however, ended the SEC’s trial against Clark without hearing Clark’s arguments or allowing the jury to weigh in, finding that the SEC’s statistical evidence was “just a matter of speculation” and that the “improbable success rate” of Clark’s trades was not evidence of anything at all: “the government can speculate that he made a little too much money, he was a little successful or more successful than he ought to be, so therefore he’s getting insider information, but there’s no evidence of it.” Judge Hilton added that “[t]here’s just simply no circumstantial evidence here that gives rise to an inference that he received the insider information.”

The Role of Statistical Evidence in Civil Cases

Is there a qualitative distinction between statistical and non-statistical evidence? According to Judge Posner, “[t]he probabilities that are derived from statistical studies are no less reliable in general than the probabilities that are derived from direct observation, from intuition, or from case studies of a single person or event.” The ambiguity of “statistical” evidence does not differ in kind from the ambiguity of “non-statistical” evidence. The “real problem” of statistical evidence is not the explicit characteristics of the evidence itself; it is instead the interpretation given to that evidence. At its core, evidence takes on meaning for trials only through the process of being considered by an individual. And Judge Hilton’s interpretation of the SEC’s statistical evidence of “suspicious trading” could have been very different from the jury’s interpretation of the same evidence. Moreover, while the use of statistical analysis to identify insider trading is novel, the use of statistical analysis in other fields to provide legal proof is not. Many courts have permitted proof of causation through statistically-based evidence in toxic tort cases, even when the evidence is thin and attenuated, and stronger and better evidence is unavailable. The courts and regulators also rely on statistical analysis to help prove systemic employment discrimination and the efficacy of treatments in clinical trials. This is because the approach employed in statistical analysis of arriving at a conclusion by ruling out plausible alternative explanations is consistent with judicial fact-finding.

The SEC has been very successful in litigating insider trading claims solely on the basis of statistical evidence. For example, in SEC v. Ieremenko, et. al., a case brought against a hacker and several traders who traded on nonpublic information stolen from the SEC’s EDGAR database, the SEC successfully argued that the defendants’ trading was correlated with the EDGAR hacks: “[i]t is virtually impossible that [the suspicious trading] could have occurred by random chance. Statistical analysis shows that for each of the Trader Defendants, the odds of that trader trading so disproportionately in hacked events by random chance ranged from less than 7 in 10 million to less than 1 in 1 trillion. This means that for each of the Trader Defendants, it is nearly impossible that their trading is uncorrelated with the hack of the EDGAR system.”

Thus, it is surprising that the SEC’s case against Clark was dismissed so early. The SEC appealed and, if it prevails, the ultimate legal impact of Judge Hilton’s outlier decision should be minimal. Judge Hilton did not give the SEC a chance to establish evidence of scienter based on strong circumstantial statistical evidence.

An Expert’s Advice for the Plaintiffs’ Bar for Successful Prosecution of Insider Trading Claims

What steps can plaintiffs’ lawyers take to leverage the value of statistical evidence in identifying and deterring wrongdoing in insider trading cases? To find out, I interviewed Daniel Taylor, a professor at The Wharton School of the University of Pennsylvania, who leads the Wharton Forensic Analytics Lab and has done extensive research on insider trading. According to Taylor, a weakness of the plaintiffs’ bar is that it tends to rely on experts who are credentialed law professors not trained in data analysis and visualization. Lawyers don’t understand the power of data and often do not know how to convincingly present statistical evidence to a fact-finder. Taylor says that the plaintiffs’ bar needs a broader expert network for insider trading that includes experts in data analysis and the tools for presenting that analysis to laymen, such as charts and graphs. According to Taylor, there is a lack of visualization within many legal briefs that allege suspicious trading. Taylor says that in an insider trading case, persuasive and compelling evidence would consist of probability calculations and an analysis of counter-factuals. For example, one can highlight an extreme outlier trade by comparing the trade to the distribution of normal trades. Another helpful technique would be to explain the counter-factual: for example, as it was with Clark, it is exceptionally rare for an individual to liquidate their retirement accounts, max out their credit lines, take out an auto loan, and risk those proceeds investing in out-of-the-money options unless the individual knew they had MNPI.

COVID-19 and the Litigation Pandemic

POMERANTZ MONITOR | MAY JUNE 2022

By The Editors

In January 2020, as the novel coronavirus spread globally and the death toll rose, so too did peoples’ fears. While many companies diligently shared information about their new risks with shareholders, others sought to profit from the widespread anxiety. On March 12, 2020, one day after the World Health Organization declared the novel coronavirus to be a pandemic, the first COVID-19-related securities class action lawsuits were filed. Each of these litigations is representative of a separate trend in subsequent securities class actions related to COVID-19: cases that target industries, such as pharmaceuticals, whose products are involved in responding to the coronavirus, and cases that target industries that the virus directly affected, such as cruise lines.

One of the two securities class actions filed on March 12, 2020, targeted Inovio Pharmaceuticals, Inc. (“Inovio”) and its CEO, J. Joseph Kim. Kim, in two public appearances in February 2020 – one on Fox Business News and one with President Trump – claimed that Inovio had already developed a COVID-19 vaccine and would start phase one testing in the early summer. Inovio’s stock price skyrocketed amidst a buying frenzy – that is, until Citron Research disclosed that Inovio did not, in fact, have a viable vaccine. Subsequently, the company was forced to acknowledge that it had merely “designed” one. According to the complaint, that disclosure led to a two-day drop in Inovio’s share price that “wiped out approximately $643 million in market capitalization for the Company, marking a 71% decline from its Class Period high.”

The second COVID-19-related securities action filed on that day sued Norwegian Cruise Line Holdings (“NCL”) on behalf of a proposed class of shareholders who had purchased shares of the company during the three weeks before the pandemic was declared. On February 20, 2020, NCL issued a press release stating that “despite the current known impact” from the coronavirus outbreak, as of the week ending February 14, 2020, “the Company’s booked position remained ahead of prior year and at higher prices on a comparable basis.” In other words, they had plenty of ticketed passengers and NCL was still planning on setting sail with them. It further stated that the company “has an exemplary track record of demonstrating its resilience in challenging environments” and that NCL had “proactively implemented several preventive measures to reduce potential exposure and transmission of COVID-19.”

The complaint alleged that these statements, as well as others in the company’s SEC filings published concurrently with the press release, were false and misleading. The complaint quoted a Miami New Times article that reported that leaked internal NCL emails demonstrated that the company had pressured its sales teams to mislead customers about the coronavirus and to respond to customers’ concerns by suggesting, among other things, that the virus could not survive in warm Caribbean climates. The article further reported that while news of the coronavirus was dramatically reducing cruise bookings, management was “trying to downplay the disruption in sales at all costs.”

The Securities and Exchange Commission (“SEC”) gave initial COVID-19 guidance to companies when, on April 8, 2020, its Chairman, Jay Clayton, and Director, Division of Corporation Finance, William Hinman, issued a joint statement titled “For Investors, Markets and Our Fight Against COVID-19.” They stated that company disclosures should “respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”

Inovio and Norwegian Cruise Line: The Rulings

In February 2021, the court largely upheld the Inovio plaintiffs’ claims described above; the case is ongoing.

As for Norwegian Cruise Line, on April 10, 2021, Judge Robert N. Scola, Jr. of the Southern District of Florida granted NCL’s motion to dismiss with prejudice. As Kevin M. LaCroix posted on the D&O Diary on April 12, 2021 “Judge Scola seemed comprehensively skeptical of the plaintiff’s case.” The judge held that the statements at issue were protected by the “safe harbor” provision for forward-looking statements of the Private Securities Litigation Reform Act of 1995. This provision encourages companies to provide projections of future financial results and other forward-looking statements, so long as such statements are identified as forward-looking and accompanied by strong cautionary disclosure about factors that could cause actual results to differ materially from those disclosed in the statements.

Judge Scola also held that, as to the alleged marketing scheme to downplay the impact of the coronavirus, plaintiff made the assumption “that at the time these statements were made, the statements were false,” but the Judge wrote that “it is worth noting that at the time the alleged marketing scheme was taking place, then-President Trump made similar statements regarding COVID-19 and therefore it is arguable that these statements were not even deceptive, insofar as they aligned with the pronouncements of our nation’s President.”

Lest some are tempted to speculate on Judge Scola’s political leanings, given his reliance on President Trump as an arbiter of truth, the Monitor would like to point out that the judge was appointed by President Obama.

The Trajectory: Then to Now

Early COVID-related securities actions focused on companies that relied on misrepresentation to increase share price and insufficient risk disclosures prior to the pandemic. Years later, these continue to be central to many complaints. The initial cases primarily targeted companies that the virus directly impacted, such as pharmaceutical companies and cruise lines. As allegations broadened to include challenges to companies’ representations about how the pandemic impacted projections of future financial performance and consumer behavior, so too, the types of industries targeted by securities lawsuits expanded. Technology companies, manufacturers of pandemic-related products, travel companies, finance, utility, and social media companies have all been sued for violations of the federal securities laws. The Securities and Exchange Commission (“SEC”) has stepped in to address COVID-19 related fraud with enforcement actions. Derivative cases stemming from COVID-19 securities class actions have been filed against directors of corporations for inadequately fulfilling their fiduciary duties during the pandemic.

On January 26, 2022, Pomerantz was appointed co-lead counsel in a putative securities class action lawsuit against biotechnology company, Novavax, Inc., arising from Novavax’s statements made in connection with its failed attempt to bring its COVID-19 vaccine candidate, NVX-CoV2373, to market. Plaintiffs allege that Novavax misled investors about the vaccine’s purported successful development, production, and imminent approval by the U.S. Food and Drug Administration (“FDA”). “In reality,” according to the complaint, “Novavax’s vaccine was nowhere close to being approved for use: (a) because the vaccine’s purity and potency numbers fell well below FDA safety requirements as a result of severe manufacturing problems including several undisclosed contamination events at its two U.S. manufacturing facilities; (b) because of a failure to manufacture the vaccine at scale; and (c) because of supply chain disruptions—all of which caused significant delays that jeopardized any chance Novavax had to capitalize on the market for Covid-19 vaccines.”

A series of partial disclosures, beginning on May 10, 2021, revealed problems with NVX-CoV2373, including manufacturing issues and delays with its application for Emergency Use Authorization from the FDA. Finally, on October 19, 2021, Politico published an article entitled “They rushed the process: Vaccine maker’s woes hamper global inoculation campaign.” The article reported that Novavax “faces significant hurdles in proving it can manufacture a shot that meets regulators’ quality standards” with respect to NVXCoV2373” and cited anonymous sources as stating that Novavax’s “issues are more concerning than previously understood” and that the company could take until the end of 2022 to resolve its manufacturing issues and win regulatory authorizations and approvals.

Pomerantz is vigorously fighting to vindicate defrauded Novavax shareholders’ rights and recover their losses caused by fraud.