Slack Ruling

POMERANTZ MONITOR | MAY JUNE 2023

By Christopher Tourek

On June 1, 2023, the Supreme Court decided Slack Technologies, LLC v. Pirani – a much-watched case in the securities litigation field – and overturned the Ninth Circuit’s holding that would have dramatically lowered the bar for plaintiffs to bring Section 11 and 12(a) claims involving direct listings. In doing so, the Court upheld the “tracing requirement” for Section 11 claims, while also signaling a de-coupling of Section 11 and Section 12(a) (2) claims.

The Securities Act of 1933 requires companies to make disclosures through a registration statement and a prospectus before they can offer certain shares to the public for sale. Under Section 11 of the Securities Act of 1933, anyone who acquired a security that was sold in connection with that registration statement and prospectus can sue if the registration statement was materially false or misleading and that investor lost money. Similarly, under Section 12(a)(2) of the Securities Act of 1933, anyone who acquired a security that was sold in connection to a prospectus that contained a material misstatement can sue if they suffered a loss. Unlike actions brought under Section 10(b) of the Securities Act of 1934, Section 11 and 12(a) (2) actions impose strict liability on defendants, meaning that defendants can be guilty even if the misstatements were unintentional. However, because of this strict liability, courts have generally limited the availability of Section 11 and 12(a)(2) claims to plaintiffs who can plead and prove that they bought securities registered under the registration statement at issue. This requirement is known as the “tracing requirement.”

It was against this legal backdrop that the securities litigation against Slack arose. Slack is a software company that went public in June 2019 through a direct listing of its shares, rather than a traditional Initial Public Offering (“IPO”). Unlike in an IPO where newly registered shares are traded on an exchange for an initial period before pre-existing unregistered shares are traded, a direct listing allows both new shares subject to the registration statement and existing shares not subject to the registration statement to be traded immediately. In pursuing this direct listing, Slack filed a registration statement registering 118 million shares which were offered simultaneously with 165 million unregistered shares.

In September 2019, investor Fiyyaz Pirani, filed suit against Slack and a number of its directors and officers under Sections 11 and 12(a)(2) of the Securities Act of 1933, alleging misrepresentations in connection with Slack’s direct listing. Slack moved to dismiss Pirani’s complaint, arguing that Pirani had no standing because he could not satisfy the tracing requirement. In effect, Slack argued that Pirani was unable to show that he purchased some of the 118 million registered shares, and not some of the 165 million unregistered shares. In making its argument, Slack focused on language found in Sections 11 and 12(a) specifying that liability claims under those sections may be brought by a person acquiring “such security” – a phrase Slack argued referred to a security registered pursuant to a registration statement. The Northern District of California District Court ultimately denied Slack’s motion to dismiss despite Slack’s tracing requirement argument. Slack subsequently appealed this decision to the Ninth Circuit.

In September 2021, the Ninth Circuit, in a 2-1 opinion, affirmed the District Court’s holding and stated that, “Slack’s shares offered in its direct listing, whether registered or unregistered, were sold to the public when ‘the registration statement . . . became effective,’ thereby making any purchaser of Slack’s shares in this direct listing a ‘person acquiring such security’ under Section 11.” The Ninth Circuit added that were the Court to adopt Slack’s reasoning, the outcome “would essentially eliminate Section 11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares.” The dissent argued that the majority’s holding reflected a departure from more than 50 years of jurisprudence applying the tracing requirement. Unsurprisingly, Slack appealed the Ninth Circuit’s decision to the Supreme Court.

In its briefs, Slack argued that only persons who could definitively trace their shares to the June 2019 registration had standing to assert claims under Sections 11 and 12(a)(2) and that the Ninth Circuit’s holding undercuts the longstanding application of the tracing requirement. Slack also argued that Sections 11 and 12(a)(2) offer the plaintiff a tradeoff – the benefits of strict liability if a plaintiff can meet the sometimes high standard of the tracing requirement. Slack further dismissed policy concerns that its position would provide companies de facto immunity from Section 11 claims for direct listings, arguing that there are several other avenues for justice, including Section 10(b) of the Securities Act of 1934.

In rebuttal, Pirani argued that the Ninth Circuit was correct in holding that he had standing to sue under Sections 11 and 12(a)(2) because the registered and unregistered securities were sold at the same time, under and pursuant to Slack’s first and only registration statement. Pirani also argued that while there must be some connection between the offering of shares and the registration statement, Section 11 does not necessarily apply only to registered shares. Instead, Pirani contended that anyone who purchased shares that required a registration statement in order to be sold (which would include both registered and unregistered shares in a direct listing) could bring suit under Sections 11 and 12(a)(2). Pirani also emphasized that it is nearly impossible to discern whether shares purchased in a direct listing are registered or not, thus creating an impossible hurdle when trying to establish standing.

The implications of the parties’ arguments were clear enough. Slack’s position would essentially grant immunity from Section 11 and 12(a) claims for anything stated (or misstated) in a registration statement or prospectus connected with a direct listing. Pirani’s position would essentially abolish the tracing requirement entirely and allow Sections 11 and 12(a) claims to be brought by anyone who purchased a security that needed a registration statement in order to be sold, regardless of whether that security was registered to the (misleading) registration statement.

During oral arguments, the Supreme Court appeared open to Slack’s view of Section 11, with Chief Justice Roberts telling Pirani’s counsel, “The statute says, ‘such security.’ I mean that’s a big hurdle for you to get over.” Additionally, Justice Kagan told Pirani’s counsel, “It does seem to me like you have a hard row to hoe here.” Nevertheless, the Court appeared hesitant to endorse Slack’s position on claims under Section 12, saying that there is little case law and the SEC has not weighed in on the issue. Highlighting this reticence was Justice Kavanaugh, who told Slack’s counsel, “[t]hat strikes me as a big issue for these direct listings and something that I’m not sure we’re fully equipped at this moment to chime in on.” Indeed, both Justices Kavanaugh and Gorsuch suggested that they might side with Slack on the Section 11 claim but return the case to the Ninth Circuit to revisit the Section 12 claim. Justice Kavanaugh made a point that he was “worried about making a mistake” given that neither the lower courts nor the SEC had extensively analyzed the Section 12 issue.

Ultimately, the Supreme Court held that plaintiffs bringing claims under Section 11 of the Securities Act are still required to satisfy the tracing requirement, even when the case involves a direct listing. In reaching the decision, Justice Gorsuch wrote that the better reading of Section 11 “requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement.” The Court then remanded the case back to the Ninth Circuit. However, the Supreme Court did not expressly apply this ruling to the Section 12 claim, and instead admonished the Ninth Circuit for its previous belief that Sections 11 and 12 “necessarily travel together,” instead cautioning that “the two provisions contain distinct language that warrants careful consideration.”

What this ruling will mean for plaintiffs is unknown, but it will likely increase the difficulty for plaintiffs attempting to sue a company that sells shares pursuant to a direct listing, since distinguishing between registered and unregistered shares sold at the time of a direct listing could prove impossible. Because of this difficulty, a cottage industry may be created of experts whose sole purpose is to identify whether a share was registered or unregistered when purchased. Finally, while it is unknown how the Ninth Circuit (and Supreme Court) will interpret Section 12 in light of this ruling, the Court’s opinion at least signals a divergence between Section 11 and Section 12 jurisprudence.

The SEC’s Proposed Rules: Protecting Investors in Cryptocurrencies

POMERANTZ MONITOR | MAY JUNE 2023

By Thomas H. Przybylowski

On January 4, 2023, the United States Office of Information and Regulatory Affairs (“OIRA”) released the Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions (the “Agenda”). The Agenda, which outlines the short- and long-term regulatory actions planned by various administrative agencies, includes rules submitted by the U.S. Securities and Exchange Commission (“SEC”) in the proposed or final rule-making stage. In a statement published that same day, SEC Chair Gary Gensler stated, in relevant part:

I support this agenda as it reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets. Our ability to meet our mission depends on having an up-to-date rulebook—consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.

The SEC’s regulatory actions on this unified agenda would help make our markets more efficient, resilient, and fair, including through rulemaking items we have been directed by Congress to implement. Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The SEC’s contributions to the Agenda include proposed rules designed to enhance company disclosures regarding human capital management and corporate board diversity, changes to registered investment companies’ fees and fee disclosure, and rules focusing on “cybersecurity and [the] resiliency of certain commission registrants.” Furthermore, the SEC is considering amendments to “modernize rules related to equity market competition and structure such as those relating to order routing, conflicts of interest, best execution, market concentration, pricing increments, transaction fees, core market data, and disclosure of order execution quality statistics.”

Perhaps most relevant to the current economic climate are the SEC’s proposals related to the cryptocurrency industry. For example, in March 2023, the SEC released a draft proposed rule pertaining to “Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure.” The draft rule specified that the SEC is proposing, inter alia, “amendments to require current reporting about material cybersecurity incidents,” and “proposing to require periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk.” The intention behind the proposed rule, the draft indicates, is to “better inform investors about a registrant’s risk management, strategy, and governance and to provide timely notification of material cybersecurity incidents.”

Similarly, in an April 14, 2023 press release, the SEC announced that it was reopening the comment period for proposed amendments to the definition of “exchange” under Rule 3b-16 of the Securities Exchange Act of 1934 (the “Exchange Act”). The proposed amendment concerns the applicability of existing rules to platforms that trade crypto asset securities and would “provide supplemental information and economic analysis for systems that would be included in the new, proposed exchange definition.” In support of the reopening, Gensler stated that the supplemental release would help answer questions and comments raised by various market participants, and added, in relevant part, “[m]ake no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

The SEC’s cryptocurrency-related proposals are particularly pertinent given the recent failure of several “crypto-facing” banks. In November 2022, cryptocurrency exchange FTX collapsed among allegations of fraud and mishandled customer funds, resulting in a wide-ranging disruption of the cryptocurrency markets. By March 2023, the disruption spread to various banks that had cultivated crypto-heavy deposit bases, such as Silvergate Bank and Signature Bank, significantly undermining their financial stability. As a result, Silvergate was forced to voluntarily wind down its operations and Signature experienced a bank run that ultimately lead to receivership. Accordingly, the fall of FTX and subsequent bank failures signaled to the SEC and the market at large that cryptocurrency remains inherently volatile and must be closely monitored.

Following the announcement of its proposals, the SEC was met with harsh criticism from representatives of the Republican party. Specifically, in a House Financial Services Committee (the “Committee”) hearing held on April 18, 2023, Republican lawmakers claimed that the SEC was rushing the pace of its rulemaking in the areas of climate change risks and cryptocurrency. Moreover, Republican representatives criticized the number of enforcement actions the SEC has recently brought against cryptocurrency firms and accused Gensler of refusing to provide clarity on the applicability of securities laws on cryptocurrency and how cryptocurrency firms should comply with those laws. In addition to Republican lawmakers, several business groups have also expressed disagreement with the SEC’s 2023 proposed rules. For example, the National Association of Manufacturers sent a letter to the Committee arguing that “over the last two years the SEC has instead advanced an ambitious policy agenda that will impose costly regulatory burdens on manufacturers and hamper long-term value creation for shareholders.”

In response to these criticisms, Gensler defended the SEC’s authority to regulate the cryptocurrency industry and argued that the U.S. capital markets are as profitable and secure as they are because of federal oversight. Indeed, Gensler stated that he was “trying to drive [the digital asset industry] to compliance and if [digital asset firms are] not complying with the laws then they shouldn’t be offering their products to U.S. investors.” Noncompliance, Gensler asserted, “not only puts investors at risk, but also puts at risk the public’s trust in our capital markets.” Gensler was joined by Democratic lawmakers who also advocated for heightened regulation of the cryptocurrency industry. Representative Brad Sherman, for example, reasoned that legislation categorizing all crypto assets as securities would make it clear that “investors in crypto get the same protection as investors in stock, bonds and other intangible assets acquired for an investment purpose.” Likewise, in her opening statement at the April 18, 2023, Committee hearing, Representative Maxine Waters stated that, in the wake of the collapses of Silicon Valley Bank and Signature Bank, she “[couldn’t] believe that [the] Committee [was] rushing to take off more guardrails when we should be adding them.”

A 2022 study published by the CFA Institute revealed that 94% of state and government-sponsored pension funds are invested in one or more cryptocurrencies despite the obvious risks. Former SEC attorney Edward Seidle, in an October 3, 2022 article in Forbes, wrote:

According to Anessa Allen Santos, a Florida attorney and Special Magistrate who specializes in blockchain and fintech, one glaring reason why no pension fund should be toying with cryptocurrencies right now is “the rapid increase in regulatory hostility exercised without restraint toward cryptocurrency issuers by several federal administrative agencies.”

Whether or not the SEC’s proposed rules are adopted, it is evident that companies should pay attention to them. This is particularly relevant to businesses in the cryptocurrency industry, given the inherent volatility of digital assets and the plurality of enforcement actions the SEC has recently taken against crypto companies. As such, it would be prudent for companies to review their cybersecurity policies, procedures, controls, and response measures. This includes an analysis of a company’s governance structure to determine if any changes need to be made to the composition of boards or committees, including identifying any members that could be considered cybersecurity experts. In addition, companies may engage an outside third-party cyber penetration testing firm to review the company’s current procedures or retain a Cyber Managed Services Provider to conduct external monitoring to supplement the company’s internal processes. Ultimately, the current economic and regulatory climates, especially within the cryptocurrency industry, suggest a company is likelier to be in compliance with the SEC’s proposed rules for 2023, should they be enforced, the greater the number of preventive measures that company takes.

It remains to be seen whether the SEC’s proposed regulations for cryptocurrencies will help investors sleep better at night.

Empowered Investors, Enhanced Accountability

POMERANTZ MONITOR | MAY JUNE 2023

By Jessica N. Dell

My first encounter with environmental, social, and governance issues, or ESG, came 20 years ago when I was a college intern compiling survey results on “Corporate Citizenship and Sustainability.” At the time, the “G” – governance – was investors’ main area of focus. When they did turn their attention to environmental issues, investors primarily concentrated on how to distinguish companies that were “greenwashing,” – i.e., promoting environmental initiatives without making substantive changes – from those undertaking real reforms, and on developing tools to measure and report their returns on ESG investments.

Two decades later, as investors increasingly seek ways to integrate ESG into their investment decision-making processes, ESG issues have become a leading topic. Institutional investors are wielding their combined power to demand increased transparency, accountability, and opportunities for engagement from corporations and their boards. This article will address ESG investing from four vantage points: (1) recent trends in proxy voting; (2) what investors should expect from boards; (3) regulatory oversight and recourse under securities laws; and (4) the current backlash from conservative politicians.

In April 2023, Deloitte & Touche LLP released the results of their Global Boardroom Program’s analysis of the voting records of 101 large investors around the world. The results highlighted key concerns for the 2022 season of annual general meetings on topics including ESG, diversity, equity and inclusion (DEI), board composition and board independence, and executive pay. Deloitte’s analysis found that nearly half or more of investors across Australia, the UK, and the US called for reporting aligned with the Task Force on Climate-Related Disclosure (TCFD) guidelines. “Over half of US investors sought disclosures of industry-specific metrics published by the Sustainability Accounting Standards Board (SASB). In contrast, only one in five global investors expected that their investee companies should follow SASB industry-specific guidance. In the UK, over half of investors asked companies to align their targets with other specific metrics, such as the Paris Agreement’s 1.5°C target.”

Among investor votes on social issues, diversity stood out as a major concern. The voting policies of two-thirds of UK and three quarters of US institutional investors pointed to the importance of ethnic diversity considerations.

Deloitte’s April report dovetails with the results of their “Global Boardroom Program Frontier” survey, published in February 2023. There, respondents predicted that ESG and climate change would rank higher in priority than customer experience, innovation, and cybersecurity. Survey respondents placed responsibility for these priorities firmly with corporate CEOs and Board members, citing their leading role in cultivating and maintaining shareholder trust.

The Conference Board, a global, nonprofit think tank and business membership organization, recently convened more than 200 executives for a series of roundtables to discuss the changing role of the board in the era of ESG investing and stakeholder capitalism. Its findings confirmed that over the next five years, corporate boards should expect ESG issues to have a “significant and durable impact.” Paul Washington, Executive Director of the Conference Board’s ESG Center, identified “five key areas in which investors should expect more from boards—and be alert to red flags.” According to Washington, investors should:

1. Seek clear evidence the board is making well-informed decisions as to what ESG issues to focus on and how they are balancing the interests of stake holders.

2. Have heightened expectations of board composition and capabilities, demanding that board members have experience in strategic planning and human capital. Boards, according to Washington, should have “a robust and ongoing education program that ensures board fluency in key areas.”

3. Expect that boards have the right leadership and committees. “A board leader needs not only to be respected by fellow directors and management, but also to be open to change.”

4. Focus on how directors engage with their stakeholders; “investors should be alert to boards that seem to operate in a bubble.”

5. Look for boards to evaluate the company’s, senior management’s, and their own performance in ESG as an integral part of their annual review processes.

With increased scrutiny on ESG measures, there has also been a dialogue around enforceability, both through regulatory oversight and recourse under securities laws. An article posted on May 15, 2023, by Professor James Park of UCLA on the Harvard Law School Forum on Corporate Governance provides a useful description of the nexus between ESG and securities fraud. Park notes that courts have aggressively dismissed ESG securities cases, “primarily by applying the puffery doctrine – a longstanding presumption that rosy statements of optimism should not be taken literally.” Park argues that the current approach of courts “should be replaced by a more holistic approach that emphasizes assessment of the materiality of the ESG risk at issue.”

In January 2023, SEC Commissioner Mark Uyeda addressed ESG concerns in a talk given to the California ‘40 Acts Group, a nonprofit forum that facilitates discussions regarding matters that impact the investment management industry. Addressing the fact that ESG investment products often charge high fees, he said that touting a product as being ESG is good for business, but cautioned that “[a]lthough ESG investing is wildly popular, it is difficult to ascertain exactly what ESG means, so it is challenging to identify when an ESG investment strategy is properly labeled as such.”

Although the SEC has not to date given full guidance on ESG risk disclosures, Uyeda noted that beyond the risk of mislabeling a strategy as ESG, ESG strategies are often not adequately disclosed to clients. He stated that “an adviser can only pursue an ESG investment strategy if the client expresses a desire to pursue such a strategy after receiving full and fair disclosure regarding the salient features of the strategy, including the strategy’s risk and return profile.”

A final consideration is the impact of politics on investors’ access to ESG investing. When President Biden first took office, ESG issues were high on his list of priorities. As Robert Eccles of Oxford University and Eli Lehrer of R Street Institute commented in a recent post by the Harvard Law School Forum on Corporate Governance, the debate over ESG standards has revealed stark policy contrasts between red and blue states in the US. Blue states have considered mandating divestment from companies connected to such products as firearms and fossil fuels. On the other side, Florida Governor Ron DeSantis recently led an alliance of 18 states to push back such divestment. They propose to remove all state pension funds and state-controlled investments from firms that follow the ESG model that DeSantis and his colleagues label as “politics before fiduciary duty.”

According to Messrs. Eccles and Lehrer, neither the divestment strategy nor the anti-divestment strategy makes economic sense. They suggest a solution that they claim both the left and right should agree upon: “clear fiduciary duty laws that define who is responsible for state investment, allow them to consider ESG factors only when they contribute to economic value creation and assure that state employees in defined contribution plans can select non-ESG options.”

It is clear that the ESG landscape is changing significantly on a global level, with an increasingly complex range of challenges for investors that include, among many others, greenwashing, as described above, and “green hushing” – the under-reporting or under-communicating of sustainable practices.

Pomerantz has long championed ESG issues – whether by creating forums for institutional investors and governance experts to share knowledge, or by litigating for improved corporate governance and financial redress for damaged investors. In October 2022, Pomerantz opened an office in London, co-managed by Partner Jennifer Pafiti, who is dually qualified to practice law in the US and the UK, and Dr. Daniel Summerfield, Director of ESG and UK Client Services. Prior to joining Pomerantz, Dr. Summerfield spent 20 years at the Universities Superannuation Scheme, the UK’s largest private pension fund. Most recently, Daniel was Head of Corporate Affairs of USS, following a period of 16 years as Co-Head of Responsible Investment.

“ESG stands at a critical juncture in its development on both sides of the Atlantic,” according to Dr. Summerfield. “Its future will be determined by all market participants and their consideration of their fiduciary responsibilities and the needs and requirements of the ultimate pension fund beneficiaries.”

Pomerantz Achieves $74 Million Settlement for Arconic Investors

POMERANTZ MONITOR | MAY JUNE 2023

By The Editors

On May 2, 2023, Chief U.S. District Court Judge Mark R. Hornak of the Western District of Pennsylvania granted preliminary approval to a $74 million settlement on behalf of defrauded investors in Howard v. Arconic et al., No. 2:17-cv-01057 (W.D. Pa.), a securities class action in which Pomerantz is Co-Lead Counsel. A final approval hearing is scheduled for August 9, 2023. Arconic, Inc. is an American industrial company specializing in lightweight metals engineering and manufacturing. The company’s Reynobond insulation panels consist of two sheets of thin aluminum bonded to a thermoplastic core. The panels can be constructed with a Fire-Resistant (“FR”) core, or a less expensive but combustible Polyethylene (“PE”) core. Due to their combustible nature, Reynobond PE panels are known to be unsuitable for use in any structures measuring ten meters or higher. In multiple instances, Arconic had explicitly warned against using Reynobond PE for buildings taller than ten meters, including in marketing brochures on their website, which stated that “as soon as the building is higher than the firefighters’ ladders, it has to be conceived with incombustible material.”

On June 14, 2017, a devastating fire broke out in the Grenfell Tower block of flats in London, United Kingdom, resulting in the deaths of 72 people and injuries to more than 70 other tenants. In the wake of the tragedy, numerous investigations were conducted, ultimately revealing that, while an electrical fault within a refrigerator located on the fourth floor instigated the blaze, Arconic’s Reynobond PE panels, which covered the outside of the building, likely acted as an accelerant, contributing to the rapid spread of the flames to the floors above.

Considering this revelation, questions about why the panels were present in the tower’s infrastructure were raised, with many fire safety experts agreeing that the decision was “disturbing” and “shocking.” In an effort to distance itself from liability, Arconic argued that it “had known that the panels would be used at Grenfell Tower but that it was not its role to decide what was or was not compliant with local building regulations.” Despite these claims, less than two weeks after the fire, Arconic announced that it would discontinue global sales of Reynbond PE for use in high-rise buildings.

In August 2017, Pomerantz filed a securities class action against Arconic alleging that its stock price was artificially inflated by the company’s misstatements about the safety of its Reynobond PE insulating panels. In June 2019, Chief Judge Hornak granted defendants’ motion to dismiss the case while allowing plaintiffs to provide an amended complaint, citing the need for more concrete evidence demonstrating that Arconic and its executives had sufficient knowledge to conclude that the insulation panels they were selling posed a significant safety risk. In response, Pomerantz filed a Second Amended Complaint in July 2021, which did just that.

The second amended complaint cited numerous instances in which Arconic sold Reynobond PE panels for use in other high-rise towers in the UK and across the globe. In the UK alone, the amended complaint cited at least ten additional buildings that had been constructed or refurbished using Reynobond PE panels. Additionally, despite claims to the contrary, multiple witnesses with firsthand knowledge of Arconic’s business practices testified that the company kept exhaustive records of its Reynbond PE sales, which included the building specifications for each project. Thus, in selling flammable panels for these structures, Arconic ignored its own safety recommendations and created a serious risk to public safety.

Notably, despite the United States’ near universal ban of combustible Reynobond for buildings taller than twelve meters (40 feet), plaintiffs found that Arconic had sold these panels for use in the construction of numerous structures measuring twelve meters or higher throughout the country, including: a terminal at the Dallas/Fort Worth airport (around 26 meters); Ohio’s Cleveland Browns stadium (52 meters); and a clinic at the University of Texas Southwestern Medical Center (20 meters). The complaint also pointed to at least eighteen other instances in which deadly fires had spread through exterior wall assemblies, most of which involved high-rise buildings. The new allegations included in the second amended complaint convinced Chief Judge Hornak to not only change his mind on many of the claims he had previously dismissed, but also to make new law in plaintiffs favor on several significant issues, including the element of scienter, i.e., intent to deceive investors.

Pomerantz Partner Emma Gilmore, who leads Pomerantz’s litigation of the case, stated, “We are gratified that the court found that the amplified allegations in the second amended complaint transform the context in which defendants’ alleged misrepresentations were made. The court’s decision sets important new precedents in favor of investors.”

The $74 million settlement represents approximately 22% of recoverable damages for defrauded Arconic shareholders, an amount far exceeding the 1.8% median recovery for all securities class action settlements in 2022.

Another Wynn Win

POMERANTZ MONITOR | MARCH APRIL 2023

By the Editors

Pomerantz is Lead Counsel in a high-profile securities fraud class action against Wynn Resorts alleging a decades-long pattern of sexual abuse and harassment by the company’s founder and former Chief Executive Officer, Stephen (Steve) Wynn that was unchecked, tacitly permitted, and eventually covered up by defendants. Partner Murielle Steven Walsh leads the litigation.

Wynn Resorts owns and operates luxury hotels and destination casino resorts, including Wynn Las Vegas and Encore in Las Vegas, Nevada, Wynn Boston Harbor in Everett, Massachusetts, and Wynn Macau and Wynn Palace in Macau, China.

When, in July 2021, U.S. District Judge Andrew P. Gordon of the District of Nevada denied, in part, the defendants’ motions to dismiss the Second Amended Complaint, he stated:

At this stage, the plaintiffs have sufficiently alleged that Wynn, Maddox, Sinatra and Cootey were aware of information contradicting their statements that denied misconduct allegations. The inference that these defendants were aware of Wynn’s alleged misconduct at the time of their statements is cogent and compelling.

On March 2, 2023, Pomerantz secured a major victory for defrauded Wynn investors when Judge Gordon granted plaintiffs’ motion for class certification.

Particularly noteworthy is the court’s analysis of the defendants’ price impact arguments. First, defendants claimed that there was no front-end price impact because the stock price did not increase after the fraudulent statements. The court agreed with Pomerantz that front-end price impact is irrelevant in a price maintenance case such as ours. The theory of price maintenance, or inflation maintenance as it is also called, asserts that defendants’ fraud prevented the stock price from falling by misrepresenting or concealing bad news. In 2021, in Arkansas Teacher Retirement System, et al. v. Goldman Sachs Group, Inc., a Second Circuit panel endorsed the inflation-maintenance theory of securities fraud. Second, defendants raised “mismatch” arguments, i.e., that there is a “mismatch” between the alleged misstatements and the corrective disclosures. The court rejected these arguments too, noting that a corrective disclosure need not be a mirror image of the prior fraudulent statements, and that it is sufficient that the disclosure renders “some aspect” of the prior statements false or misleading. This decision is therefore a clear plaintiffs’ win. Also highly important is the court’s rejection of defendants’ efforts to narrow the class period.

Finally, the court rejected the defendants’ garden-variety attacks on the lead plaintiffs and found our proposed representatives to be typical and adequate. Two of the lead plaintiffs are a married couple; only one of them actually executed the trades. The court, however, found that the other spouse was nonetheless typical and adequate to represent the class.

The first complaint was dismissed by Judge Navarro, who granted Pomerantz leave to replead. Our second amended complaint was later upheld in part by Judge Gordon.

The case suffered a slight setback when Magistrate Judge Youchah effectively stayed merits discovery until class certification was decided. Pomerantz subsequently discovered that Judge Youchah had previously represented the Wynn defendants in a case arising out of the same allegations as in our case but did not disclose that fact. Pomerantz moved for her recusal, which she reluctantly granted.

On March 16, 2023, defendants petitioned the district court for permission to file an appeal of the court’s Order Granting Plaintiffs’ Motion to Certify Class.

“We are gratified that the court granted our certification motion,” stated Murielle Steven Walsh. “Plaintiffs will now proceed with merits discovery into the alleged misconduct by Stephen Wynn against Wynn’s female employees and the enabling actions by Wynn management that allowed it to go on for years. This case continues to demonstrate that corporate integrity and accountability are important issues to investors.”

Pomerantz Wins Ninth Circuit Reversal of Forescout Dismissal

POMERANTZ MONITOR | MARCH APRIL 2023

By Omar Jafri

On March 16, 2023, the Ninth Circuit Court of Appeals reversed, in part, the dismissal of Pomerantz’s securities fraud class action against Forescout Technologies, Inc. and its senior officers. In so doing, the Ninth Circuit also set important precedents that significantly strengthen investor rights.

Forescout specializes in providing network security from malware and potential infiltrators for large computer networks. The operative complaint alleges that the defendants misled investors about the strength of the company’s sales pipeline to falsely support a bullish guidance and otherwise justify poor financial results when the company repeatedly failed to meet its touted objectives.

For its initial public offering in October 2017, Forescout reported growth averaging more than 30% a year in revenues for the fiscal years prior to the IPO. This steady growth continued in fiscal year 2018, with a 32% increase in reported revenues. However, as the company entered FY 2019, it encountered heightened competition from other industry players, primarily because Forescout’s products were not as well suited as theirs to providing solutions for cloud-based cybersecurity and remote working. Nonetheless, defendants provided revenue guidance to investors of 24% annual growth in revenue for FY 2019, despite the fact that a large amount of Forescout’s deals that were identified as “committed” in its sales pipeline had only a 50% chance of closing, according to a confidential witness (“CW”) in the case.

In 2020, Forescout’s alleged deception on the market continued, following its announcement that it had entered into a merger agreement with Advent International, Inc., a private equity firm. Under the terms of the agreement, Advent would acquire Forescout for $33 per share. However, Advent soon learned that the 2020 revenue projections Forescout had provided were inconsistent with the serious deterioration in the sales pipeline that the company had already experienced.

Just three months after Forescout’s announcement of the merger, Advent privately notified the company that it was terminating its acquisition, but defendants withheld these material facts from investors. Following litigation initiated by Forescout to force Advent to proceed with the merger, both parties entered into an agreement providing for Advent to acquire Forescout for $29 per share – a $300 million discount.

In 2021, the U.S. District Court for the Northern District of California dismissed the investors’ securities fraud lawsuit twice, ruling that the plaintiffs had insufficiently alleged that the statements made by the defendants were knowingly or recklessly false and misleading when made.

Plaintiffs appealed that decision to the United States Court of Appeals for the Ninth Circuit. The Court’s decision not only allows the plaintiffs to proceed with their complaint, but it also clarifies and establishes important standards regarding pleading falsity, misleading statements, and the use of information provided by confidential witnesses.

Regarding falsity, the Ninth Circuit’s decision confirms that:

• No “dual pleading” standard exists where courts can “comingle” the lower standard for falsity with the higher standard for scienter unless the facts pleaded to support both elements are exactly the same.

• Plaintiffs can rely on an expert opinion to bolster allegations of falsity.

Regarding misleading statements, the Ninth Circuit’s decision established that:

• Defendants cannot ask courts to disregard the plain words of their own statements at the pleading stage, while instead crediting their attorney’s reimagination of what the statement said or meant.

• Concrete” statements of material fact do not need to consist of “hard numbers” and “benchmarks.” Even vague claims like “we have a very large pipeline” can mislead investors, and the law in the Ninth Circuit has not held otherwise since at least the 1990s.

• Misleading statements in direct response to specific analyst questions concerning the alleged fraud itself cannot be mischaracterized as puffery.

• A defendant cannot rely on the disclosure of hypothetical risks to escape liability for a failure to disclose that he or she already has information suggesting that an event “might not” occur.

• A risk does not need to actually materialize for cautionary language to be ineffective. A defendant’s awareness of a “significant likelihood” that the risk would materialize is enough.

• Awareness of omitted facts that render a statement misleading is sufficient to demonstrate “actual knowledge” and overcome the PSLRA’s safe harbor.

While investigating the claims in this case, Pomerantz found twenty CWs who provided information that supported the allegations made in the complaint but who had no direct contact with any individual defendant. We successfully argued that this lack of direct contact was not dispositive even though many lower courts had previously dismissed securities class actions on this very ground. As a result, regarding CWs, the Ninth Circuit’s decision clarified that:

• In pleading securities fraud, CWs do not need to talk to, hear from, or present information directly to an individual defendant.

• When a defendant quibbles that a CW does not provide evidentiary minutia, a plaintiff can cite this decision to state that the defendant is attempting to create an “impossible” standard that the PSLRA never even contemplated.

• In securities fraud cases related to misrepresentations regarding sales pipelines, a CW need not provide information about the “guidance” or “corporate level trends.”

• Courts can consider even an “estimate” provided by a single CW.

• A CW’s factual representations cannot be mischaracterized as presumed “disagreements” of “opinion” with higher level managers when the CW is reporting facts as opposed to merely expressing his or her own beliefs and opinions.

• Plaintiffs can rely on a lower-level CW who hears from a third person that a defendant did something wrong or had awareness of certain facts that rendered his or her statements materially misleading.

• Plaintiffs can rely on a CW who prepares reports for a mid-level manager, who is then alleged to have provided pertinent information to the individual defendant even if the CW did not directly present the information to the individual defendant or talk to or hear from the individual defendant.

• If CWs state that a defendant did something or knew something during the Class Period, it is not necessary for the CWs to state that any of this happened before a particular statement was made.

With the Ninth Circuit holding that plaintiffs adequately stated claims under Section 10(b) and reversing the district court’s dismissal of the Section 20(a) claims for control person liability, Pomerantz’s Forescout class action has been remanded to the district court for further proceedings.

The Firm’s Forescout litigation team is led by Partner Omar Jafri and includes Senior Counsel Patrick V. Dahlstrom and Associate Brian O’Connell.

The Sacrosanct Right to Vote

POMERANTZ MONITOR | MARCH APRIL 2023

By Gustavo F. Bruckner and Henry Tan

Among the most important rights belonging to a stockholder is the right to vote. Alongside the rights to sue and sell, the right to vote is treated by the Delaware Chancery Court as “sacrosanct.” Therefore, any challenge to a free and fair election is rigorously scrutinized by the Court as are challenges to the accuracy of information provided to stockholders in advance of an election. One issue that periodically emerges is whether a board has set out the correct voting standard, in particular as it pertains to the treatment of broker non-votes.

Today, most stockholders are no longer “stockholders of record” but rather “beneficial shareholders.” That is, they do not hold stock certificates and do not own their shares directly. Instead, they hold their shares in “street name,” while their brokerage firms act as the “stockholders of record.” During stockholder meetings, brokers have full discretion on how to vote these shares on routine matters, such as the approval to hire an independent accounting firm. However, for non-routine matters, beneficial shareholders must give instructions to their brokers on how to cast their vote. Beneficial shareholders who fail to instruct their brokers will have their shares recorded as “broker non-votes.”

Broker non-votes are not considered “votes cast” under Delaware law, so any vote that requires a majority of votes cast will not include broker non-votes in the “denominator” for purposes of tallying votes. However, if the vote requires a majority of “outstanding shares,” then broker non-votes will be included in the denominator because they are included within outstanding shares. In this situation, a broker non-vote essentially amounts to a vote against the proposal. Because broker non-votes raise the number of “yes” votes that will be needed to pass proposals, some companies have sought to circumvent the issue by failing to tabulate broker non-votes or lumping the broker non-votes with “yes” votes.

The Astrotech case illustrates the issue. On May 12, 2020, Astrotech Corporation filed a proxy soliciting stockholder approval for various proposals, including a Certificate Amendment that would authorize 35,000,000 new shares. Under the company’s rules, approval of the Amendment required a majority of outstanding shares. Since 7,575,464 shares of common stock were outstanding, approval of the proposal required 3,787,733 “For” votes. The Certification Amendment was a non-routine matter, meaning a stockholder’s failure to vote on the proposal would create a broker non-vote, effectively a vote against the Amendment.

On June 29, 2020, Astrotech held its annual shareholder meeting and released the results of the vote. The Certificate Amendment was approved by 5,306,464 “For” votes to 1,030,210 “Against” votes; however, not a single broker non-vote was tabulated. This omission was even more glaring considering that broker non-votes were correctly tabulated for the other two non-routine proposals – the votes on the directors and the vote on the Plan Amendment. All five directors and the Plan Amendment proposal received exactly 3,500,819 broker non-votes. The discrepancy suggests that Astrotech improperly counted the broker non-votes as “For” votes to pass the Certificate Amendment.

Properly tabulated, the Certificate Amendment received 1,805,645 “For” votes, 1,030,210 “Against” votes, 35,509 abstentions, and 3,500,819 broker non-votes. The voting standard required a majority of outstanding shares, and because only 1,805,645 of the 7,575,464 outstanding shares voted “For,” the Certificate Amendment failed to pass. By tacking the broker non-votes to the “For” votes, Astrotech had circumvented the will of its stockholders and improperly approved the issuing of 35,000,000 new shares.

The voting error raised new problems when the company scheduled its next shareholder meeting in 2021. Specifically, Astrotech improperly issued 9,596,206 shares over the 15,000,000 authorized limit. These unauthorized shares represented approximately 40 percent of the proper voting power. If the 2021 shareholder meeting were allowed to proceed, the unauthorized shares would have rendered the outcome invalid because it would have been impossible to tell whether the proposals were approved by valid or invalid shares. At this point, Pomerantz intervened on behalf of an Astrotech stockholder and initiated litigation in the Delaware Chancery Court to void the 2019 Certificate Amendment.

The company admitted its error and negotiated a settlement whereby Astrotech agreed to file a motion for approval under the Delaware General Corporation Law § 205, which allows the Chancery Court to approve and remedy corporate actions that were tainted by technical errors that may result in accidental harm. In this case, the Court used § 205 to approve the 2019 Certification Amendment and the shares issued under the Amendment’s authorization.

Astrotech also agreed to implement certain corporate governance policies. Specifically, the Audit Committee Charter was amended to require proxy review procedures, such as requiring an outside advisor to aid the Board in evaluating proxies for errors and omissions. Such a third-party review would likely have caught the error in the applied voting standard.

Given the opportunity for mischief that surrounds broker non-votes, shareholders can expect to see more cases concerning defective proxies due to broker non-vote issues.

The Slippery Status of NFTs

POMERANTZ MONITOR | MARCH APRIL 2023

By Brandon M. Cordovi

Non-fungible tokens (“NFTs”) have become scorching hot commodities, which has led the largest and most powerful brands across various industries to mint their own. Like cryptocurrencies, the surge in popularity of NFTs has raised difficult questions concerning whether they function as securities, which would subject them to regulation by the U.S. Securities and Exchange Commission (“SEC”) and compliance with securities laws.

NFTs are digital assets whose authenticity and ownership are recorded, or minted, on a blockchain. These assets may range from digital artwork created by a known artist, such as Alec Monopoly, to an NBA video highlight of Jalen Brunson draining a game-winning shot for the Knicks. The unique identification code and metadata assigned to each NFT is baked into its token and makes it non-fungible. NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs. NFTs, like cryptocurrency, are stored in digital wallets. Although the image linked to one NFT may be identical to the image linked to another NFT, the tokens themselves are not interchangeable. This distinguishes NFTs from cryptocurrencies. Cryptocurrencies are interchangeable, or fungible, tokens. A digital crypto coin on one blockchain is equal in value to any other digital crypto coin on the same blockchain, in the same way one dollar equals, and is exchangeable with, any other dollar. On the other hand, there may be countless NFTs of the same image – a baseball card, for example – but each NFT has its own unique identifier, akin to a numbered series of the same baseball card, and although it can be traded, it is not interchangeable with any other NFT.

Significantly, when an NFT is purchased, the purchaser only acquires the NFT. Generally, ownership rights over the image attached to the NFT remain with the creator of the work. NFTs derive their perceived value based on their scarcity. Thus, NFT developers often issue their NFTs in limited drops, making them more difficult to obtain. The rarer in NFT is, the higher its value. Additionally, the work attached to the NFT also impacts its value.

A blockchain, on which an NFT’s authenticity and ownership are recorded, provides a unique decentralized method of digitally storing information. The information is collected and stored in blocks which are linked together via cryptography. The key perceived benefit of a blockchain is that it is more secure and trustworthy than centralized authorities because it stores its information in multiple locations and intentionally makes it more difficult to add, change or remove information.

The definition of a security in the Securities Act is broad and includes the term “investment contract” within it. However, the Securities Act itself does not clarify what constitutes an “investment contract.” The Supreme Court addressed this issue and provided a framework for determining what is an investment contract, and, therefore, a security that must be registered with the SEC, in S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946).

Based on the definition set forth in Howey, courts have applied a three-pronged test to determine what constitutes an investment contract. To satisfy the Howey test, the moving party must demonstrate: (1) an investment of money; (2) in a common enterprise; (3) with the expectation of profits derived from the efforts of the promoter.

The manner in which NFTs are acquired should satisfy the first prong of the Howey test without opposition. To obtain an NFT, an individual or entity must purchase it in exchange for money.

The second prong of the Howey test, establishing a common enterprise, is a little trickier. A common enterprise can be demonstrated through a showing of either horizontal or vertical commonality. Plaintiffs will likely focus on horizontal commonality to satisfy this prong as it is more favorable, given how NFTs function. Horizontal commonality requires: (1) the sharing or pooling of the funds of investors; and (2) that the fortunes of each investor in a pool of investors are tied to one another and to the success of the overall venture.

To demonstrate the sharing or pooling of funds, the movant must first demonstrate that the funds received by the promoter through an offering are reinvested by the promoter into the business or, more broadly, are tied to an improvement of the ecosystem as a whole. Whether a particular NFT offering meets this requirement may vary on a case-by-case basis, based on the amount of entanglement and dependence there is between the developer of the NFT and the operator of the blockchain on which it is recorded. In a recent decision in the Southern District of New York (“S.D.N.Y.”), Judge Marrero found that this requirement was met where the defendant was the owner and operator of the NFT platform and also the creator, developer and operator of the blockchain on which it ran. Because the success of the NFT was entirely dependent upon the success of the blockchain, it could be plausibly alleged that the company operating both would use funds generated to grow the totality of its network. For similar reasons, the court found that the second requirement – that the investors and enterprises’ fortunes be tied – was also met.

However, the S.D.N.Y. decision was narrow and explicitly limited to the particular facts of that case. Many NFT platforms are structured differently, with separation between the owner and operator of the NFT platform and the blockchain on which it relies. Without the overt substantial entanglement between the two, it will be more challenging to establish horizontal commonality, which will largely turn on just how close the relationship between the two is. Additionally, this prong may turn on whether plaintiffs make specific allegations regarding how the funds at issue are being used in conjunction with both the NFT platform and its infrastructure.

The third prong of the Howey test is also subject to debate, presenting another hurdle to clear for plaintiffs looking to establish that NFTs are securities. It requires the expectation of profits derived from the efforts of a promoter. Courts have consistently held that this is an objective test.

The expectation-of-profits prong likely turns on the public statements disseminated by the developer of a particular NFT in conjunction with the totality of the circumstances surrounding its issuance. Public statements that explicitly tout the ability to generate profit through the purchase of a particular NFT should easily satisfy the first portion of this prong. Further, Judge Marrero, in the S.D.N.Y., recently rejected an argument that statements that do not explicitly reference gains or losses do not give rise to the expectation of profits. Consistent with this decision, statements, such as those touting record sales of a particular NFT, may give rise to the expectation of profits when considering the cost of acquiring NFTs on that platform.

Another argument related to the third prong, which may prove more difficult for plaintiffs to overcome, is whether purchasers of NFTs do so based on their desire to collect and consume them. For example, a die-hard New York Mets fan may purchase Mets-affiliated NFTs, with no intention on turning a profit, because of their strong passion for the team and their personal enjoyment. Drawing this distinction may pose a difficult challenge. However, one court has already determined that drawing this distinction is not necessary at the dismissal stage, despite such challenges.

Whether profits are derived from the efforts of the promoter poses similar questions to those assessed when evaluating horizontal commonality. This will require a case-by-case assessment of how the particular operation is organized and functions to determine how dependent those who purchase a particular NFT are on the efforts of its developer.

Since the Howey test depends on a wide range of factors that are unique to both the NFT platform being assessed and the blockchain on which it operates, determining whether an NFT is a security requires a case-by-case analysis. Given NFTs’ recent rise to prominence, as more class action litigation is brought against NFT developers, it will become clearer what plaintiffs must plead to establish that an NFT is a security subject to the securities laws. Additionally, it will be important to track whether the SEC takes a particular interest in NFTs, as it has identified the regulation of emerging technologies and crypto assets as one of its 2023 priorities. The landscape of NFTs is ever-evolving and more clarity regarding whether they are securities, subject to regulation by the SEC, should be obtained as courts and relevant agencies hone in on them.

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

Delaware Finds That Officers Have Oversight Duties

POMERANTZ MONITOR | JANUARY FEBRUARY 2023

By Samuel J. Adams

In a case of first impression, the Delaware Court of Chancery found, for the first time, that corporate officers owe a duty of oversight. The Court held that, under Delaware law, corporate officers owe the same fiduciary duties as corporate directors, which logically includes a duty of oversight. Director oversight duties are commonly referred to as “Caremark duties,” after the seminal opinion of Delaware law issued in In re Caremark International Inc. Derivative Litigation. Critically, the Court also found that officers who breach their duty of oversight can be held liable in derivative litigation brought by stockholders.

The case at issue involves a derivative action brought by stockholders of McDonald’s Corporation against David Fairhurst, McDonald’s former Head of Human Resources, among others. The action, In re McDonald’s Corporation Stockholder Derivative Litigation, was filed in the wake of a series of high-profile employee walkouts in protest of allegedly widespread incidents of sexual harassment and retaliation at McDonald’s restaurants. The action also alleges that Fairhurst contributed to a “boys’ club” culture at corporate headquarters, where alcohol use was permitted, and human resources allegedly turned a blind eye to executive misconduct. In addition, the plaintiffs pointed out that Fairhurst himself had been accused of three separate incidents of sexual harassment during his tenure as Head of Human Resources at McDonald’s.

The plaintiffs’ derivative lawsuit alleged that Fairhurst breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct. They assert that Fairhurst breached his oversight duties because he did not make a good faith effort to establish an information system necessary to manage the company’s human resources responsibilities, including the responsibility to monitor and respond to allegations of sexual harassment. The plaintiffs also alleged that Fairhurst failed in his obligation to address or report upward to the company’s Board of Directors or CEO any “red flags” regarding sexual harassment that came to his attention. Finally, the plaintiffs alleged that Fairhurst’s repeated acts of sexual harassment constituted a breach of duty in themselves.

Faced with these allegations, Fairhurst argued that no court in Delaware had ever explicitly found that officers owe oversight duties. However, the Court concluded that the plaintiffs stated a claim against Fairhurst, due to both his failure to exercise proper oversight and his own alleged misconduct.

In rejecting Fairhurst’s arguments, the Court looked to the history of Caremark. First, the Court noted that, as a practical matter, responsibility for managing the operations of a corporation is shared between the officers and the directors, with the officers tasked with managing the day-today operations of the corporation. In light of the seriousness of these roles, the Court found that oversight duties should apply with equal force to both officers and directors. The Court added that directors only meet a handful of times per year, adding to the importance of officers rigorously complying with their fiduciary duties.

Second, the Court noted that directors can only fulfill their own oversight duties if corporate officers have a commensurate oversight duty to gather information and bring any red flags to the attention of the board of directors. Logically, if officers did not have oversight duties, the entire system of corporate governance would break down and there would be no mechanism in place to ensure that directors received the information required to effectively oversee company management and the company. In short, failing to confirm that officers owe oversight duties would undermine the directors’ ability to fulfill their own statutory obligation to direct and oversee the business and affairs of the corporation.

While officers and directors owe the same duties, the Court added that the oversight duty is “context-driven” and will vary depending on the role of the individual and the facts of the case. By way of example, CEOs and directors have company-wide areas of responsibility, while other executives may have responsibilities that are more limited. The Head of Human Resources may only be responsible for overseeing HR, while a CFO has responsibility for financial reporting. In those cases, the officer’s obligation to establish an oversight system aligns only with their area of responsibility. However, if an officer becomes aware of a red flag, that officer still has an obligation to address the red flag and report it internally, even if the red flag does not concern their particular area of responsibility at the corporation.

Here, the Court found that the plaintiffs had adequately pled an oversight claim against Fairhurst based on a “red flags theory,” noting allegations that Fairhurst had consciously failed to address red flags and “permitted a toxic culture to develop at the Company that turned a blind eye to sexual harassment and misconduct.” The Court also determined that Fairhurst’s alleged sexual harassment is itself a breach of the fiduciary duty of loyalty, noting Continued from page 1 that “[w]hen engaging in sexual harassment, the harasser engages in reprehensible conduct for selfish reasons. By doing so, the fiduciary acts in bad faith and breaches the duty of loyalty.”

Will the McDonald’s opinion open a floodgate of stockholder litigation against corporate officers? Perhaps not. Claims against corporate officers arising from alleged misconduct are generally derivative in nature, meaning that the claim against the officer belongs to the corporation and not to the stockholders. As such, before a stockholder can pursue a derivative claim against an officer of a corporation under Delaware law, a stockholder-plaintiff must first either make a pre-suit demand on the board to commence litigation against the officer, or else explain in their own lawsuit why making such a litigation demand on the board would have been futile. This is a high burden for a stockholder to clear under Delaware law. The Court also noted that oversight claims against officers will be subject to the same bad faith standard that applies to corporate directors in the context of an oversight liability claim.

At a minimum, the McDonald’s opinion could lead to an increase in officers being named as additional defendants in derivative lawsuits seeking to hold directors accountable for violating their own oversight duties. As the McDonald’s Court noted, “it seems likely that if a court found a board liable for breach of an oversight obligation, then the officers with responsibility for that area also would be liable…” Accordingly, Delaware may see an increase in senior members of management being forced to answer for their conduct in derivative litigation against directors.

In addition, the opinion invites boards that have been duped by executives to commence litigation against the former officers. McDonald’s notes that where an officer was not providing adequate oversight, but the directors did not have reason to know this, the board may have relied on the officer in good faith. In that scenario, McDonald’s makes clear that a board would be in a position to pursue oversight claims against the officer without facing liability for oversight claims themselves. It remains to be seen whether boards will utilize the playbook provided to them in McDonald’s to sue former officers on their own initiative following instances of misconduct and officer oversight violations.

Caremark Revisited

POMERANTZ MONITOR | JANUARY FEBRUARY 2023

By The Editors

Given the large percentage of companies that are incorporated in Delaware, and the Chancery Court’s outsized role in interpreting corporate duties, the impact of the Delaware Chancery Court’s 1996 ruling in Caremark was felt far beyond that state’s borders. The ruling holds directors individually liable if they fail to supervise and monitor their company’s information and reporting systems.

The Caremark derivative suit, filed in 1994, claimed that the members of Caremark’s board of directors breached their fiduciary duty of care to Caremark in connection with alleged violations by Caremark employees of federal and state laws and regulations applicable to health care providers.

As a result of the alleged violations, Caremark was investigated for a period of four years by the United States Department of Health and Human Services and the Department of Justice (“DOJ”) and, in 1994, the company was charged with multiple felonies. Caremark subsequently entered into agreements with the DOJ and had to spend approximately $250 million to settle its federal lawsuits and repay third parties.

On the heels of the DOJ indictment, five stockholder derivative actions were filed in the Delaware Chancery Court that sought, on behalf of the company, to recoup these losses from the individual defendants who constituted Caremark’s board of directors. The separate suits were later consolidated. Defendants and plaintiffs agreed to settle the claims and the proposed settlement was submitted to the

• Delaware Court of Chancery for approval, which it received. It was in his ruling on the matter that then-Chancellor William T. Allen handed down two precepts that have largely defined the duty of care of corporate directors to this day: that “the core element of any corporate law duty of care inquiry [is] whether there was good faith effort to be informed and exercise judgment.”

• that “a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.”

As Gustavo F. Bruckner, Pomerantz Partner and head of the Firm’s Corporate Governance practice, wrote in his Monitor article, “Director Oversight: Seeking the Holy Grail.”:

“A Caremark claim is possibly the most difficult type to pursue in corporate law, as most do not even survive the pleading stage. To survive a motion to dismiss, the complaint must plead specific facts demonstrating that the board totally abdicated its oversight responsibilities. Even the court in Caremark, a case which involved indictments for Medicaid and Medicare fraud, could not conclude that such a breach had occurred in that case.”

Pomerantz Expands Securities Litigation Practice Group

POMERANTZ MONITOR | JANUARY FEBRUARY 2023

Pomerantz is proud to announce the promotions of Omar Jafri and Brian Calandra to Partner and the addition of Justin D. D’Aloia as a Partner in the Firm’s Securities Litigation Practice Group.

OMAR JAFRI

Since joining Pomerantz in its Chicago office in 2016, Omar Jafri has appeared on behalf of investors in over two dozen securities cases, authored over 50 pleadings and briefs, taken and defended over two dozen depositions, and argued numerous substantive motions in the U.S. District Courts as well as multiple appeals in the U.S. Courts of Appeals.

In a securities fraud class action against Chicago Bridge & Iron Co., N.V., Omar’s contributions were instrumental in defeating the defendants’ Motion to Dismiss. He was a drafter of the amended complaint and deposed witnesses that included the senior executives at the company’s finance department, the head of the company’s Power Division with direct oversight of the power plants, the company’s outside auditors, and other important third parties. The court denied the defendants’ motions for summary judgment on virtually every claim in August 2021. The defendants settled the Class’s claims for $44 million on the eve of trial in February 2022, even though the corporate defendant and its parent had declared bankruptcy while the case was pending.

In 2021, Omar was Co-Lead Counsel in a securities fraud action against Nabriva Therapeutics Plc for false representations about a new drug application pending before the FDA. After the case was dismissed, Omar drafted a second amended complaint, bolstering allegations of scienter with documents received from the FDA and with experts’ opinions. After discovery, the case settled for $3 million, or between 21% and 30% of total class-wide damages -- an exceptionally high percentage for a securities class action.

“Omar operates at a high level,” said Partner Joshua B. Silverman. “His tenacity and knowledge of securities law make him formidable in the courtroom, and a good example for younger lawyers.”

Omar has an active pro bono criminal practice representing individuals charged with the most serious crimes in the State courts of Illinois. He successfully defended a client against charges of first-degree murder by persuading the State to offer time served and forgo a retrial. In another first-degree murder case, he persuaded the trial court and the Illinois Supreme Court to allow a Frye hearing on the admissibility of fingerprint evidence for the first time in the history of Illinois.

In 2021, 2022 and 2023, Omar was recognized by Super Lawyers® as a Rising Star in Securities Litigation. In 2021, he was named to the National Law Journal’s inaugural list of Rising Stars of the Plaintiffs’ Bar under the age of 40, a new category in the Elite Trial Lawyers competition for lawyers who “demonstrated repeated success in cutting-edge work on behalf of plaintiffs over the last 18 months [and] possess a solid track record of client wins over the past three to five years.”

Omar graduated magna cum laude and Order of the Coif from the University of Illinois College of Law, where he was a Harno Scholar and a recipient of the Rickert Award for Excellence in Advocacy and won first place for best Oral Advocate in the semi-final round of the Midwest Moot Court Competition. Learn more directly from Omar as the featured subject of this issue’s Q&A on page 7.

BRIAN CALANDRA

After serving as Of Counsel in Pomerantz’s Securities Litigation Practice Group, Brian Calandra has been promoted to Partner. Brian is based in the Firm’s New York office.

Brian has extensive experience in securities, antitrust, complex commercial, and white-collar matters in federal and state courts nationwide. Before joining Pomerantz, Brian represented issuers and underwriters in securities class actions involving the financial, telecommunications, real estate, and pharmaceutical industries. He also represented financial institutions in antitrust class actions concerning foreign exchange; supra-national, sub-sovereign and agency bonds; bonds issued by the government of Mexico; and credit card fees.

Since joining Pomerantz in 2019, Brian has helped recover millions of dollars for investors in securities fraud class actions against issuers in the pharmaceutical, cannabis, and interactive technology industries. In 2022, Brian led Pomerantz’s securities litigation class actions against DouYu International Holdings Limited, China’s largest game-centric live streaming platform, and 22nd Century Group, Inc., a biotechnology company working to genetically engineer reduced-nicotine tobacco products and reduced-THC cannabis-based products.

In DouYu, Brian achieved a $15 million global settlement of securities fraud claims arising out of the company’s $775 million debut on the Nasdaq in 2019. Plaintiffs alleged that DouYu withheld information from its IPO investors, including that its virtual currency “Yuchi” and “lucky draw” gifting feature ran afoul of Chinese gambling regulations.

In 22nd Century, Brian and Managing Partner Jeremy A. Lieberman convinced the 2nd Circuit to reverse, in part, the district court’s decision to dismiss the plaintiffs’ complaint with prejudice when the lower court found that defendants had no duty to disclose either the use of paid stock promotions or an SEC investigation into the company. Brian and Jeremy successfully argued that the district court erred because the court overlooked that omitting the existence of the SEC investigation made statements about the accounting weaknesses and defendants’ subsequent denials of the investigation misleading.

“Brian brings creative critical thinking and a deep knowledge of the law to each of his cases,” said Partner Murielle Steven Walsh. “He is a staunch defender of investors’ rights.”

Brian has written on developments in securities law and other topics, including co-authoring an overview of insider trading law and enforcement for Practical Compliance & Risk Management for the Securities Industry, co-authoring an analysis of anti-corruption compliance risks posed by sovereign wealth funds for Risk & Compliance, and authoring an analysis of the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act on women in bankruptcy for the Women’s Rights Law Reporter.

In 2021, Brian was honored as a Super Lawyers® “Top-Rated Securities Litigation Attorney.”

Brian graduated from Rutgers School of Law - Newark in 2009, cum laude, Order of the Coif. While at Rutgers, Brian was Co-Editor-in-Chief of the Women’s Rights Law Reporter and received the Justice Henry E. Ackerson Prize for Distinction in Legal Skills as well as the Carol Russ Memorial Prize for Distinction in Promoting Women’s Rights.

JUSTIN D. D’ALOIA

Justin D. D’Aloia has joined Pomerantz as a Partner in the Securities Litigation Practice Group in the Firm’s New York office.

Prior to joining Pomerantz, Justin was counsel at a large international law firm where he litigated high-profile securities cases in federal and state courts across the country. He has represented issuers, underwriters, and senior executives in matters involving a range of industries, including the financial services, life sciences, real estate, technology, and consumer retail sectors. Justin’s practice covers the full spectrum of proceedings from pre-suit demand through settlement.

Justin has received awards for his commitment to pro bono service, including the considerable hours he spent representing a wrongfully convicted man during special proceedings held in connection with his exoneration.

“Justin brings to Pomerantz a wealth of experience in securities litigation on both sides of the V,” said Managing Partner Jeremy A. Lieberman. “The Firm and its clients will benefit from the breadth and depth of Justin’s knowledge and his dedication to justice.”

Justin earned his undergraduate degree from Rutgers University with a concentration in Business and Economics. He received his J.D. from Fordham Continued from page 5 University School of Law, where he was Editor-in-Chief of the Fordham International Law Journal. Among Justin’s published articles is “From Baghdad to Bagram: The Length & Strength of the Suspension Clause After Boumediene.” This predictive Note aimed to define the outer contours of the Suspension Clause by looking through the Boumediene prism to determine who may invoke the protections of the Suspension Clause and in what contexts outside of Guantánamo Bay those protections apply.

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.