Pomerantz Secures $47 Million Settlement for Defrauded Novavax Investors

By the Editors

In May 2024, Pomerantz achieved final approval of a $47 million settlement on behalf of defrauded investors in a securities class action against American biotechnology company Novavax, Inc.

In January 2020, as the novel coronavirus spread globally and the death toll rose, so too did peoples’ fears. While many companies diligently shared information about their new risks with shareholders, others, such as Novavax, sought to profit from the widespread anxiety. 

In early 2020, a government grant put Novavax in prime position to capitalize on the market for a Covid-19 vaccine. However, the company's vaccine production efforts allegedly fell short of FDA safety requirements due to severe manufacturing problems, including undisclosed contamination events at its U.S. facilities; failure to manufacture the vaccine at scale; and supply chain issues. These issues led to delays in regulatory submissions and an inability to produce vaccines at scale. Despite these challenges, defendants continued to reassure investors of the vaccine program's success, causing Novavax's stock to remain high.

As stated in the amended complaint, “Defendants personally made millions because of their rosy statements touting the successful vaccine development and manufacturing process that caused Novavax stock to remain at near record levels based on investors’ belief that the Company was in pole-position to sell billions of doses in the near future.”

The truth about the vaccine's failure surfaced in October 2021 when Politico published an article titled, “They rushed the process: Vaccine maker’s woes hamper global inoculation campaign.” Politico reported that Novavax “faces significant hurdles in proving it can manufacture a shot that meets regulators’ quality standards” and cited anonymous sources as stating that Novavax’s manufacturing problems and regulatory hurdles “are more concerning than previously understood” and that the company could take until the end of 2022 to resolve its manufacturing issues and win regulatory authorizations and approvals. This revelation caused Novavax's stock to plummet, injuring investors who relied on defendants' false statements. Over the class period, Novavax stock collectively fell over 50% in response to revelations about the company’s issues.

Partner Brian Calandra led the litigation with Managing Partner Jeremy A. Lieberman.

Curiouser and Curiouser – the Changing Dynamic of Shareholder-Corporate Engagement

POMERANTZ MONITOR | MARCH APRIL 2024

By Dr. Daniel Summerfield

In the world of corporate governance and stewardship, change is becoming the new status quo. We are witnessing significant shifts in how shareholders engage with corporations and how those companies respond. To paraphrase Alice in Wonderland, it’s becoming curiouser and curiouser as market participants adapt to the new normal. I outline below some recent developments that illustrate this evolving dynamic, in no particular chronological order.

Holding companies to account for climate change commitments

There is a growing realisation that the road to net zero under the 2015 Paris Climate Agreement will be rocky, even if a firm has prepared a detailed plan. This is, to a large extent, due to assumptions built into many such corporate plans, such as an expected presence of supportive government policies and customers’ capacity to deal with the transition. Such assumptions may be built on misplaced optimism, lack of proper due diligence, or some of each. As a result of the ever-changing context, there is an increased challenge for companies in terms of their corporate climate commitments, particularly where these are not backed up by adequate plans and policies.

Indeed, a recent study by USS and University of Exeter outlined four narrative climate scenarios out to 2030 based on a framework that embraces the radical uncertainties surrounding the potential positive as well as negative tipping points. The scenarios focus on the vicissitudes of politics and markets and, to a lesser extent, on the climate itself, in the form of extreme weather events. Only in the most optimistic of the four scenarios does it seem possible that global emissions will be halved by the end of the decade despite the best intentions – and perhaps due to the lack of best intentions – of market participants.

It should therefore come as no surprise that, as companies step back from their previous commitments, we are seeing an escalation of engagement approaches being employed by shareholders to hold management to account.

In January 2024, twenty-seven institutional investors backed a resolution against Shell plc filed by the Dutch shareholder activists at Follow This; the resolution will be voted on at Shell’s May 2024 Annual General Meeting (“AGM”). The resolution calls for the oil company to align its medium-term emissions reduction targets with the Paris Climate Agreement. It was co-filed by influential investors from Belgium, France, the Netherlands, the UK, the USA, Sweden, and Switzerland. These include, among others, Europe’s largest investor, the French asset management firm Amundi, as well as the Rathbones Group, Scottish Windows, and NEST.

Another interesting feature with this filing is that, despite the fact that the 27 investors manage assets with a combined value of $4.2 trillion, the investors collectively hold only 5% of Shell’s stock.

In mid-March, after the resolution was filed, Shell backtracked on its climate targets, lowering its emission reduction targets from 20% to 15-20% by 2030 and scrapping its emission reduction targets of 45% by 2035.

“With this backtrack,” stated Mark van Baal, founder of Follow This, “Shell bets of the failure of the Paris Climate Agreement … only Shell’s shareholders can change the board’s mind by voting for our climate resolution at the shareholders’ meeting in May.”

 A similar resolution at Shell last year was supported by only 20% of shareholders.

A comparable proposal which was filed against Exxon Mobil in the U.S. by Follow This and Arjuna Capital was met with an unprecedented and worrying response in the form of a lawsuit by the company that targeted the investors who filed this resolution. Exxon Mobil is justifying their litigation by alleging the SEC’s inability to enforce rules that govern when investors can resubmit shareholder proposals. According to ExxonMobil, a court “is the right place to get clarity on SEC rules,” adding that “the case is not about climate change.” To date, despite the proposal being withdrawn, the company is going forward with their lawsuit. It remains to be seen if this will have a dampening effect on the filing of shareholder resolutions in the U.S.

Challenging companies’ decision-making processes

Another interesting development in the U.S. was seen in a recent successful lawsuit by an individual shareholder who challenged the process by which Elon Musk’s $55 billion pay package was approved by Tesla’s board of directors. The Delaware judge overseeing the case voided Musk’s compensation package, stating that Musk controlled the board through his personality and influence and the board could therefore not demonstrate that the share grant had been executed at a fair price or through a fair process. In the judge’s words, “Musk was the paradigmatic ‘Superstar CEO and dominated the process that led to board approval of his compensation plan.’”

According to corporate experts such as Professor Charles Elson at the University of Delaware, a case such as this “has not happened before. It is extraordinary.” Although other academics have questioned whether it will set a precedent, there are likely to be significant reverberations felt in other boardrooms that may indeed lead to a review of the independence of board chairs of other companies. It also remains to be seen if Musk follows through with his threat to move Tesla from Delaware to Texas, the irony of which will not be lost on those who remember companies such as NewsCorp relocating to Delaware because of the state’s perceived light touch of protections for investors.

Whatever the reverberations of the Tesla case, the perception by detractors that securities litigation simply serves to drain corporate funds has lost credibility. It is increasingly recognised that the two main goals of active and responsible shareholders that participate in securities litigation are a) to recover money lost as a result of corporate malfeasance and b) to increase the long-term value of the defendant companies through positive changes in corporate governance and corporate behaviour.

Indeed, securities litigation can be seen as an additional tool in shareholders’ engagement armoury by addressing corporate wrongdoing through the implementation of corporate governance changes. The reality is that, under the proper circumstances, shareholder litigation can bring about significant changes which will protect investors that wish to remain invested and increase shareholder value over the long term.

Looking forward

Another development we are beginning to see in markets such as those in the UK and Italy, is a perceived regulatory race to the bottom as listing regimes seek to find ways to attract IPOs by diluting hitherto sacrosanct investor protections as a way of enticing companies to list in their respective markets. This can only result in companies with poor governance standards taking advantage of these reduced standards by listing in these markets. If that is the case, then we are only likely to see an increased use by shareholders of tools such as securities litigation and shareholder proposals as a way of holding management to account and deterring other companies that might be tempted to follow a path that is not in their shareholders’ or stakeholders’ interests.

SEC Passes Climate Disclosure Rules After Two-Year Wait

POMERANTZ MONITOR | MARCH APRIL 2024

By Jonathan D. Park

On March 6, 2024, the United States Securities and Exchange Commission (“SEC”) approved a set of long-awaited regulations requiring securities issuers to provide climate-related disclosures in their annual reports and registration statements. The final rules significantly scale back the proposal released nearly two years prior, after a comment period that saw record levels of feedback from investors, industry groups, and other stakeholders. SEC Chairperson Gary Gensler, who was joined by two Democratic colleagues in a 3-2 party-line vote approving the regulations, stated that “[t]hese final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”

After the regulations are phased in, the final rule will require many registrants to disclose, among other things: certain greenhouse gas (GHG) emissions, subject to a materiality requirement; climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition; the actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook; and any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks.

In financial statements, registrants will be required to disclose, in the income statement, aggregate expenditures and losses as a result of severe weather events and other natural conditions, as well as to disclose costs and charges recognized on the balance sheet due to severe weather events and other natural conditions. Both of these requirements are subject to a monetary threshold. If carbon offsets and renewable energy credits (“RECs”) are material to a registrant’s plan to achieve disclosed climate-related targets, the registrant must disclose a roll-forward of the beginning and ending balances. Registrants must also disclose whether, and if so, how, severe weather events and other natural conditions, as well as disclosed climate-related targets or transition plans, materially affected estimates and assumptions reflected in the financial statements. Large accelerated filers (issuers with a public float of $700 million or more) must begin making these financial statement disclosures in annual reports or registration statements that include financial statements for the year ending December 31, 2025, while accelerated filers (issuers with a public float greater than $75 million but less than $700 million) have an additional year to comply. The financial statement disclosures will be subject to audit requirements and management’s internal control over financial reporting. For large accelerated filers and accelerated filers other than smaller reporting companies (SRCs) and emerging growth companies (ERGs), the registrant’s auditor will assess controls over these disclosures.

During the comment period after publication of the proposed rule, significant attention was paid to the question of what information companies would be required to disclose outside of the audited financial statements. In particular, the final rule requires registrants to disclose “Scope 1” GHG emissions (i.e., those from the registrant’s owned or controlled operations) and “Scope 2” GHG emissions (i.e., those from purchased or acquired electricity, steam, heat, or cooling). In a change from the proposed rule, these disclosures are only required if they are material. Materiality, the SEC emphasized, is not determined merely by the amount of these emissions, but by whether a reasonable investor would consider the disclosure as having significantly altered the total mix of information made available. For instance, the SEC explained, “[a] registrant’s Scopes 1 and/or 2 emissions may be material because their calculation and disclosure are necessary to allow investors to understand whether those emissions are significant enough to subject the registrant to a transition risk that will or is reasonably likely to materially impact its business, results of operations, or financial condition in the short- or long-term.”

The rule allows registrants to delay Scope 1 and Scope 2 disclosures until the due date of their Q2 quarterly report for the following year. Large accelerated filers must begin including Scope 1 and Scope 2 emissions disclosures in annual reports or registration statements that include financial statements for the year ending December 31, 2026. Accelerated filers have two additional years to comply. SRCs, ERGs, and nonaccelerated filers are exempt from the requirement to provide GHG emission disclosures.

Beginning with fiscal year 2029, large accelerated filers must attest with “limited assurance” as to the accuracy of the Scope 1 and Scope 2 emissions disclosures. Beginning two years later, such filers must attest to the accuracy of these disclosures with “reasonable assurance.” Accelerated filers (other than SRCs and ERGs) need only provide “limited assurance” attestations beginning with fiscal year 2033.

The rule will also require disclosure of processes for identifying, assessing, and managing material climate-related risks; information about any climate-related targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition; and any oversight by the board of directors of climate-related risks and any role by management in assessing and managing such risks.

Notably, the final rule does not require disclosure of “Scope 3” GHG emissions, which are those produced along the registrant’s “value chain,” such as by the registrant’s suppliers. Though Scope 3 emissions can be substantial, and even greater than a company’s Scope 1 and Scope 2 emissions, the SEC eliminated this disclosure requirement in the face of vigorous opposition by business groups. This was likely an attempt to head off challenges and the prospect of a court decision invalidating the regulation.  Scope 3 disclosures are required by the European Commission’s Corporate Sustainability Reporting Directive (CSRD), as well as by California for certain companies doing business in that state, so many issuers will be obligated to assemble and report such information in any case.

Several lawsuits seeking to invalidate the rule have already been filed by Republican attorneys general of several states, industry groups, and energy companies.  Environmental advocates have also sued, arguing that the rule does not go far enough, in particular by removing Scope 3 disclosure requirements.  The cases have been consolidated in the United States Court of Appeals for the Eighth Circuit.  Many consider the Eighth Circuit a conservative court where the Republican and industry challengers will find a sympathetic ear.

If the final rule eventually becomes effective, investors will surely benefit from the disclosures it requires, despite its pared back scope. A company’s GHG emissions, and any plans to mitigate them or otherwise achieve climate-related targets, are increasingly necessary for investors to evaluate a company’s outlook. Moreover, disclosure of how extreme weather events have affected a company’s financial condition is increasingly material in light of the growing frequency and severity of such events.  If the rule becomes effective, lawsuits and investigations regarding alleged violations of the disclosure requirements are likely, and will further clarify company’s obligations under the rule.

The final rules are available on the SEC’s website (https://www.sec.gov/rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors) and will be published in the Federal Register.

SEC Finalizes Rules Relating to SPACs, Shell Companies, and De-SPAC Transactions

POMERANTZ MONITOR | MARCH APRIL 2024

By Brian O’Connell

On January 24, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and guidance that affect Special Purpose Acquisition Companies (“SPACs”) and offerings in which SPACs acquire and merge with private company targets (“de-SPACs”). The rules were initially proposed in March 2022 and were followed by a comment period. Approval was granted via a 3-2 vote, with two commissioners making statements in dissent. The rules a set to become effective July 1, 2024. The rules aim to enhance investor protection, including increasing disclosure requirements in connection with SPAC offerings, as well as to explicitly align SPAC offerings with traditional IPOs.

SPACs, also known as “shell” or “blank check” companies, are development-stage companies that have no operations of their own, apart from seeking private companies, known as “target companies,” with which to engage in a merger or acquisition to take the target public. The SPAC first has gone public via its own IPO. Once the merger between the SPAC and the target company is complete, the target, or operating company, is the sole surviving entity, and it transitions to a public company. This transaction and IPO with the target company is called a de-SPAC, since the SPAC essentially ceases to exist in the process.

SPAC IPOs have surged in popularity in recent years. In 2021, the United States saw a whopping 613 SPAC IPOs, representing 59% of all IPOs that year. SPACs have often relied on celebrity backing to boost their popularity: for example, Shaquille O’Neal advised a SPAC for Beachbody; Peyton Manning, Andre Agassi, and Steffi Graf invested in a SPAC for Evolv Technology; Jay-Z invested in The Parent Co.; Serena Williams served on the board of directors of Jaws Spitfire Acquisition Corp.; Alex Rodriguez is CEO of Slam Corp., and former Speaker of the House Paul Ryan served as Chairman of Executive Network Partnering Corp. Much like their concern with celebrity-backed crypto investments, regulators have been anxious about retail investors’ vulnerability to being misled by a famous name backing a blank check company offering. Although SPACs have subsided somewhat in popularity since their peak in 2021, SPAC IPOs remain in the news, with Trump Media Technology Group going public via de-SPAC on March 26, 2024 under the ticker “DWAC.” SPAC IPOs still accounted for 43% of IPOs in 2023.

Many have raised concerns that the SPAC structure lacks investor disclosure and transparency policies that serve as investor protections under the Investment Company Act. This means that SPAC investors lack protections that are typical in traditional IPOs, which leaves SPAC retail investors vulnerable to being misled. However, critics of the new rules, including dissenting commissioner Mark Uyeda, have pointed out that SPACs now require disclosures in excess of equivalent M&A transactions.

Given the attention and lure to retail investors, regulators will continue to focus on this means of IPO, and these new rules will shape the disclosure requirements for SPACs and de-SPACs. The SEC’s new rules set out to enhance disclosure requirements and provide guidance on the use of forward-looking statements with respect to SPACs, SPAC IPOs, blank check companies, and de-SPAC transactions. Specifically, the new rules provide that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor is not applicable to de-SPAC transactions, which now explicitly aligns de-SPAC offerings with traditional IPOs. In his statement on January 24, SEC Chair Gary Gensler noted that “investors are harmed when parties engaged in a de-SPAC transaction over-promise future results regarding the target company”—something that investors regularly have suffered, as forecasted results have by and large not panned out. Although the PSLRA safe harbor is explicitly not applicable, other safe harbors, such as the “bespeaks caution” doctrine, which is judicial as opposed to statutory, may still apply. However, this new rule may tamp down on the amount and frequency of overly rosy projections in de-SPAC offerings.

The rules also address issuer obligations and liabilities for de-SPAC IPOs, including requiring that SPAC target officers sign the de-SPAC registration statements, which make them liable for misleading statements. The rules also include a new provision, Rule 145a, which makes the issuer a registrant under the Securities Act.

The final rules require disclosures from issuing companies at both the SPAC blank check stage and the de-SPAC stage regarding conflicts of interests, dilution risks, and the target company operations. Regarding dilution, the rules require detailed disclosure concerning material potential sources of additional dilution that non-redeeming SPAC shareholders may experience at different phases of the SPAC lifecycle, including the potentially dilutive impact of the securities-based compensation and securities issued to the SPAC sponsor, its affiliates, and promoters; any material financing transactions after the SPAC’s IPO, or financing that will occur in connection with the de-SPAC transaction closing; and redemptions by other SPAC shareholders.

The rules further require additional disclosure about the SPAC sponsor, its affiliates, and any promoters, including their experience, material roles and responsibilities, and the nature and amount of all compensation of these parties. SPAC sponsors will be required to disclose the circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters have or could transfer ownership of any of the SPAC’s securities. The rules also require the identification of the controlling persons of the SPAC sponsor and any persons who have direct or indirect material interests in the SPAC sponsor and the material terms of any “lock-up” arrangements for the SPAC sponsor and its affiliates. SPAC IPOs and de-SPAC IPOs will also be required to state in the prospectus cover pages the SPAC’s timeframe to complete a de-SPAC, redemption rights, and the SPAC sponsor’s compensation.

The SEC declined to adopt Rule 140a, which had been included in the proposed rules in March 2022. This would have clarified that anyone who acts as an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC is engaged in the distribution of the surviving public entity’s securities. Such a person or entity, therefore, would be construed as an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. Under Section 11 of the Securities Act, underwriters can be liable for misstatements in registration statements, which incentivizes them to perform careful due diligence. Although this rule was not adopted, the SEC explained in the Final Release that it believes “the statutory definition of underwriter, itself, encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction,” and therefore construes anyone involved in the distribution within a de-SPAC to fall within the meaning of Section 2(a)(11) of the Securities Act.

Under these rules, SPAC target companies that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 will be required to make non-financial disclosures that are included in a traditional IPO, including: (i) Item 101 (description of the business); (ii) Item 102 (description of property); (iii) Item 103 (legal proceedings); (iv) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (v) Item 403 (security ownership of certain beneficial owners and management, assuming completion of the de-SPAC transaction and any related financing transaction); and (vi) Item 701 (recent sales of unregistered securities).

Overall, these rules aim to reduce the differences between de-SPAC offerings and traditional IPOs that led to SPAC investors being less robustly protected. Companies should be mindful of these new rules, while investors can now make use of their enhanced protections when choosing to invest in a SPAC, vote on a merger, redeem or not redeem shares in a de-SPAC, or invest in a de-SPAC offering. The new regulations mean that due diligence processes in advance of de-SPAC offerings will likely take longer, and that investors will have more protections, both in terms of the robustness of disclosures and legal options should the prices decline.

Pomerantz Scores Major Victory in Investor Suit Against Y-mAbs

POMERANTZ MONITOR | MARCH APRIL 2024

By The Editors

In February 2024, Pomerantz overcame defendants’ motion to dismiss a major investor suit against Y-mAbs Therapeutics, Inc. and its executives. The case alleges that Y-mAbs made numerous misleading statements about the FDA approval process for its primary product, omburtamab.

Y-mAbs is a clinical biopharmaceutical company headquartered in New York that develops and markets antibody-based therapies. In 2020 and 2021, Y-mAbs’ leading drug candidate was omburtamab, a therapy designed to treat neuroblastoma, a type of cancer that forms in nerve cells. In 2020, Y-mAbs submitted a Biologics License Application (“BLA”) as part of the FDA approval process for omburtamab. In the application, Y-mAbs included a single-arm study comparing the overall survival results of patients using omburtamab with an external control constructed using data from the Central German Childhood Cancer Registry (“CGCCR”), rather than with a study control group. However, the company received a Refusal-to-File (“RTF”) letter from the FDA indicating substantial flaws in the data Y-mAbs presented in its application. Y-mAbs issued a press release on October 5, 2020 informing investors of the RTF letter, but without actually publishing the contents of the letter. Instead, they assured the market that the RTF was issued merely for non-substantive reasons. Y-mAbs confirmed that the letter contained “new issues being raised that hadn’t been discussed previously,” but portrayed the FDA’s concerns optimistically, saying that it was a “minor setback,” “not a problem,” they “have everything” to cure the deficiencies, and that there was “no concern that the FDA will think, ‘Oh, that is not sufficient response.’”

In reality, since 2016 the FDA had repeatedly warned the company that the patient population in the study Y-mAbs submitted was not comparable to the population in the CGCCR. Contrary to what the company claimed, these deficiencies were not “new issues.” Additionally, Y-mAbs and its executives knew they could not fully address all the points the FDA raised, as a satisfactory resubmission called for a comparison of patients who had also received craniospinal irradiation, which the CGCCR dataset did not contain.

The FDA maintained its position as it discussed the resubmission of the BLA with Y-mAbs in January 2022, reiterating that the CGCCR data was fundamentally flawed and that Y-mAbs did not provide sufficient information to support the BLA. The FDA told Y-mAbs that it had failed to adequately address the deficiencies that the agency had identified and that aspects of the Y-mAbs analysis were “arbitrary.” Ultimately, the FDA informed Y-mAbs that if the company could not provide an adequate comparator, “an alternative clinical development program” would need to be discussed. Despite this feedback, Y-mAbs went out of its way to reassure investors that “all the information that we need, we have,” and the FDA and Y-mAbs were “aligned” on the resubmission. The company even claimed that there was a “clear regulatory path forward,” and the resubmission was “progressing as planned.”

Y-mAbs had previously told investors the company would not file the BLA until they “reach a final agreement with the [FDA]” and “get a green light.” However, on March 31, 2022, in keeping with a statement from a February earnings call in which Y-mAbs said it expected to resubmit the BLA by the end of the first quarter of 2022, the company resubmitted the BLA for omburtamab “prior to reaching agreement with the FDA on the content of the application.”

On October 26, 2022, the FDA released a Briefing Document for the Oncologic Drug Advisory Committee.  The document laid out the FDA’s findings that the clinical trials on which Y-mAbs had based its application were inadequate and not well-controlled, and therefore did not provide sufficient evidence that omburtamab is safe and effective.

Two days later the Advisory Committee unanimously voted to deny FDA approval for omburtamab. The committee concluded that the “difference in survival cannot be reliably attributed to omburtamab.” On this news, Y-mAbs’ share price plummeted over 76%.

The court reviewed defendants’ motion to dismiss by dividing the alleged false statements into four categories: statements regarding timing of resubmission, statements regarding progress towards resubmission, statements interpreting clinical data, and statements interpreting FDA feedback and guidance.

The first category covers statements regarding the future timing of resubmission, such as “[we] expect this year to complete our BLA submission.” The court held that such statements were not actionable as they constituted forward-looking statements or opinions, which are protected by the PSLRA’s safe harbor for forward-looking statements.

The second category comprises statements regarding progress towards resubmissions. Examples of these statements include that the resubmission was “going as planned” and “progressing well.” The court decided that these statements were not actionable under Omnicare, which established that a “reasonable investor” may understand an opinion statement to convey facts about how the speaker formed the opinion. As the FDA continued to meet with the company, the court concluded that this point fell short of a “serious conflict” between the FDA’s interim concerns and the defendants’ optimism. Even though the statements “fail[ed] to disclose the FDA’s repeated statements of concern,” the court reasoned that the FDA’s interim feedback did not actionably conflict with defendants’ statements about FDA approval because the optimistic statements were consistent with the FDA’s guidance about how deficiencies could be overcome.

The third category consists of statements interpreting clinical data. When defendants interpreted Study 03-133 and Study 101, they stated that there is a clear “clinical benefit in terms of response rates and survival.” The court rejected the assertion that these statements were misleading because they do not claim that the FDA had interpreted the studies similarly.

The most consequential category of statements was the fourth: statements interpreting FDA feedback and guidance. For example, in May 2022, defendants stated that a “pre-BLA meeting with the FDA in January” had “confirmed our path towards our March BLA resubmission, which we ultimately achieved.” The court upheld plaintiffs’ allegation that statements by Y-mAbs characterizing FDA feedback and guidance were materially misleading. The court distinguished statements interpreting FDA feedback from the optimistic statements it found nonactionable because they described “the current state of resubmission” rather than future optimism. The court ruled that, even if these statements were opinions, the company misled investors because the FDA had outstanding concerns that were never resolved when the company resubmitted the BLA. This finding opens a direct pathway for defrauded investors to pursue recovery for the significant damages they incurred by Y-mAbs’ misleading statements.

The court held that Pomerantz adequately alleged scienter, given y-mAbs’ knowledge of the FDA’s concerns, as demonstrated through the continuous communication between defendants and the FDA. The court also held that Pomerantz adequately alleged loss causation, writing, “each statement appears to contradict a warning by the FDA and these warnings were made clear in . . . the FDA Briefing Document, which was released just before the stock price fell.”

“Companies are allowed to be as optimistic as they want,” according to Pomerantz Partner Michael Wernke, who leads Pomerantz’s litigation of the case. “But they can’t be optimistic about what the FDA actually says.” While investors are overwhelmingly incentivized to applaud companies’ optimism about their products and progress, when corporate optimism mischaracterizes feedback from regulators and the news comes to light, investors must work to protect their rights in the face of corporate fraud. The case is now proceeding to discovery.

The FDIC’s Proposed Standards for Corporate Governance and Risk Management

POMERANTZ MONITOR | NOVEMBER DECEMBER 2023

By Michael J. Wernke

On October 11, 2023, the Federal Deposit Insurance Corporation published for comment in the Federal Register proposed standards for corporate governance and risk management (“Proposed Standards”) for the financial institutions it regulates that have $10 billion or more in total assets (“covered institutions”). Under its safety and soundness powers in Section 39 of the Federal Deposit Insurance Act, the FDIC is able to publish such standards that go beyond mere guidance. The new standards are part of the FDIC’s regulatory response to the bank failures that took place in the spring of 2023. Referring to the post-mortem evaluations conducted by the FDIC and the Federal Reserve Board following the Signature Bank and Silicon Valley Bank failures, the preamble to the Proposed Standards asserts that poor governance and risk management practices were contributing factors that led to the collapse of those banks.

The FDIC’s Proposed Standards are based on the principles set forth in the Office of the Comptroller of the Currency’s Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches (the “Heightened Standards”), but with key differences. The Proposed Standards include more details on what the FDIC expects from the boards of directors as well as the banks that the FDIC regulates. They also set a notably lower minimum asset threshold (five times lower) than the OCC’s Heightened Standards to determine which banks are covered.

The Proposed Standards were approved 3-2: Chairman Gruenberg, CFPB Director Chopra, and acting Comptroller Hsu voted in support; Vice Chairman Hill and Director McKernan voted against the proposal.

Comments on the Proposed Standards are due by February 9, 2024. (This date was extended from the original deadline of December 11, 2023).

Background

The FDIC’s Proposed Standards delve into legal issues that—in the case of banks that do not have a federal charter—have typically been determined by state law. These include the duties and responsibilities of bank boards, directors, and management, including their duties of care and loyalty, as well as related concepts such as the business judgment rule.

While banks are primarily governed by state corporate governance law, there are instances in which federal oversight is enforced. For example, federal law imposes audit standards and a gross negligence “floor” on the conduct of bank directors and officers. Federal law also requires that federal banking regulators impose operational and managerial standards, compensation standards, and appropriate standards relating to asset quality, earnings, and stock valuation.

Specifically, following the poor risk management that led to the 2008 financial crisis, federal banking regulators enacted increased oversight of the governance and risk management of banks. The OCC initially imposed heightened expectations for the governance and oversight of the larger banks that it regulated and, in 2014, it adopted those Heightened Standards as a specialized standard for safety and soundness at larger federally chartered banks. Also in 2014, the Federal Reserve implemented part of the Dodd-Frank Act by establishing several risk management requirements for larger bank holding companies. This was followed in 2021 by expectations for effective governance by larger bank boards. 

Proposed Guidelines

Note that in some specific instances, a covered institution may leverage its parent company’s risk management program or board to meet the standards of the Proposed Guidelines.

Obligations Covered directors would have a duty to safeguard the interests of the bank, confirming that the bank operates in a safe and sound manner and in compliance with applicable federal and state law. In supervising the bank, a board should consider the interests of all of its so-called stakeholders, going beyond shareholders and depositors to include creditors, customers and even the regulators themselves.

Composition The Proposed Guidelines set out minimum standards for board composition, requiring a majority of its members to be independent and outside directors. Boards would also be expected to consider the diversity of their members, including social, seniority, and educational differences, among others. The Proposed Guidelines also caution against excessive influence from a “dominant policymaker.”

Duties Covered boards would need to (i) set an appropriate tone and establish a responsible, ethical corporate culture; (ii) evaluate and approve a strategic plan; (iii) approve and annually review policies; (iv) establish and annually review a written code of ethics; (v) actively oversee the bank’s activities, including all material risk-taking activities; (vi) exercise independent judgment; (vii) select and appoint qualified executive officers; (viii) establish and adhere to a formal training program; (ix) conduct an annual self-assessment of its effectiveness; and (x) establish and annually review compensation and performance management programs.

Committees The Proposed Guidelines require boards to maintain a risk committee and compensation committee in addition to the audit committee required by Section 36 of the FDI Act and Part 363 of the FDIC’s regulations. Risk committees would need to meet at least quarterly and maintain records of their proceedings, including risk management decisions.

Risk Management The Proposed Standards would impose expectations for the risk management program that a bank should develop and maintain. These expectations largely match the OCC’s Heightened Standards. For example, like the Heightened Standards, the Proposed Guidelines would require covered institutions to adopt a three-lines-of-defense risk management framework with a front-line unit (exclusive of the legal department), an independent risk management unit led by a Chief Risk Officer, and an internal audit unit led by a Chief Audit Officer.

The Proposed Guidelines provide that the risk management program would need to address a wide variety of potential risk categories, ranging from credit, interest rate, and liquidity risks to anti-money laundering and third-party partnership and outsourcing risks. Further, material breaches of risk limits and emerging risks would need to be reported in a timely manner to the board and the chief executive officer.

Identifying and Reporting Violations of Law The Proposed Guidelines would require a covered institution’s board to establish and annually review processes that would require either front-line units or the independent risk unit to report all violations of applicable laws and regulations to law enforcement or any appropriate federal or state regulatory agency. This would represent a shift from the FDIC’s current practice of encouraging, but not requiring, self-reporting of violations.

Questions The FDIC asks multiple questions in order to scope banks that should be subject to the Proposed Guidelines, including whether FDIC-supervised institutions with $10 billion or more in total consolidated assets is an appropriate threshold and whether other financial institutions should fall under the definition of a covered institutions.

Implications and Objections

Collectively, the escalation of reporting requirements imposed by the proposal would appear to increase the likelihood of FDIC enforcement actions. The rule passed by a 3-2 vote of the FDIC Board. Each of the two Republican-affiliated Board members (Director McKernan and Vice Chairman Hill) issued a public dissenting statement.

Critics such as Director McKernan have pointed out that certain requirements in the Proposed Standards would exceed, or simply differ from, the Heightened Standards in prescriptiveness and stringency, creating confusion. For example, the FDIC sets its threshold for application ($10 billion or more in consolidated assets) much lower than the Heightened Standards (federally chartered banks with at least $50 billion in consolidated assets). The Proposed Standards also lean toward a rules-based approach to corporate governance, in contrast to the principles-based approach that is prevalent under state law. Critics have asserted that the Proposed Standards are presented as “good corporate governance” without appreciating that what is “good” for one bank may not be “good” for another with FDIC Vice Chairman Hill saying regulators need to resist “one-size-fits-all” best practices.

FDIC Director McKernan also asserted in his dissent that the requirement that the bank board “consider the interests of all its stakeholders, including shareholders, depositors, creditors, customers, regulators, and the public” could be at odds with bank directors’ fiduciary duties under applicable state law, for example, if a director voted against the interests of shareholders in order to serve the interests of customers or the “public.”

As mentioned above, the period for comment was extended to close on February 9, 2024.

What’s in an Acronym? (Or, Can Bill Ackman “SPARC” a Fix to SPACs?)

POMERANTZ MONITOR | NOVEMBER DECEMBER 2023

By Louis C. Ludwig

A recent innovation in the realm of investment vehicles, SPACs, or Special Purpose Acquisition Companies, have experienced a dramatic rise and fall in the past few years. Unlike traditional IPOs, SPACs go public without a business model, later acquiring or merging with an existing company with a defined business. In so doing, SPACs circumvent many of the disclosures required of a traditional IPO. This provides a quicker path to going public, however avoiding the safeguards that the disclosures impose has led to a disturbing string of frauds and scandals. This, in turn, has resulted in SPACs trading for under $10 per share, as well as some companies withdrawing from previously announced SPAC deals, even if they have to pay millions of dollars to the SPAC for backing out. The sense that SPACs are endangered may be what prompted billionaire investor (and former SPAC aficionado) Bill Ackman to step into the arena of SPAC reform. Ackman’s innovation comes in the form of the suspiciously-similar-sounding “SPARC,” or Special Purpose Acquisition Rights Company.  However, the question remains: is this enough to save the SPAC from extinction?  The answer: quite possibly.

SPACs are sometimes referred to as “blank check companies” because they are created for the sole purpose of acquiring another company and taking it public. They recall the 1980s penny stock market where highly speculative stocks sold for less than $5 per share. Most penny stock offerings were similarly made by blank check companies whose stated purposes were to merge with a to-be-identified target. While penny stocks were cheaper than shares sold on reputable exchanges such as the NYSE, the unregulated market on which they were traded was rife with manipulation and outright fraud, subsequently dramatized in classic films like Boiler Room and The Wolf of Wall Street. By 1990, annual investor losses of $2 billion prompted Congress and the SEC to finally regulate the penny stock market through the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (PSRA) and Rule 419, respectively.

Fortunately for fans of Wild West-style investing, two bankers developed the concept of a SPAC in the 1990s as an end-run around the PSRA and Rule 419. Like the penny stocks of yore, SPACs lack their own business model; initial investors simply have no idea what type of company they will ultimately be investing in. When formed, SPACs usually have an industry in mind, such as mining or software, but no specific acquisition target. The gap between the empty holding company and the entity that ultimately emerges through the SPAC process has led some observers to note that a more accurate term is “SCAMs.”

The typical SPAC timeline is as follows: first, the SPAC’s sponsors, who often possess significant financial and reputational clout, e.g., Martha Stewart and Shaquille O’Neal, provide the starting funds for the SPAC; second, the sponsors, assisted by underwriters, take the SPAC public through a standard IPO, which allows the SPAC to raise funds that are held in a trust, pending identification of an acquisition target; and third, assuming the sponsors identify a target company within 18 to 24 months and obtain shareholder approval, the SPAC merges with the target company in a process known as “De-SPAC-ing.” Once the de-SPAC is complete, the resultant company retains the name and operations of the target company, which then trades publicly on a stock exchange. Shareholders can typically redeem their investment if the 18 to 24-month window lapses and shareholders vote to extend the period for the SPAC to find an acquisition target, or if an acquisition target is found but the shareholders don’t like it.

As the number of SPACs skyrocketed from 2019 into 2021, the informational disadvantage to investors inherent in the penny stock market began to reproduce in the SPAC space. SPACs have raised vast sums selling warrants as part of their IPOs, which can be used to buy shares in the de-SPAC-ed company. In the de-SPAC process, sponsors receive compensation in the form of a large ownership stake for a nominal cost, setting up a textbook conflict of interest. As The D&O Diary’s Kevin LaCroix aptly put it, “[t]he conflict arises from the SPAC sponsor’s financial interest in completing a merger even if the merger is not value-creating, which may conflict with the shareholders’ interest in redeeming their shares if they believe that the proposed merger is disadvantageous.” What’s more, these lucrative sponsor compensation arrangements create dilutive effects affecting investors in the SPAC.

Even where they can show they’ve been wronged, SPAC investors are likely to have the courthouse doors slammed in their faces. Freed from the constraints of a traditional IPO, SPAC operators are permitted to speak directly to the market about the SPAC’s financial prospects. SPAC projections are generally protected by the safe harbor for forward-looking statements afforded by the Private Securities Litigation Reform Act (PSLRA), whereas projections made in connection with traditional IPOs are beyond the PSLRA’s safe harbor.

Almost as soon as SPACs became popular, scandals began to erupt. Nikola and Clover Health Investments, two of the biggest SPACs to go public in 2020, found themselves embroiled in fraud investigations conducted by the SEC and DOJ.  In July 2021, Ackman’s own SPAC, Pershing Square Tontine Holdings, abandoned a deal to buy 10% of Vivendi’s flagship Universal Music Group after the SEC flagged several elements of the deal. According to Ackman, a colorful figure best known for his crusades against Herbalife and Harvard President Claudine Gay, the SEC “said that, in their view, the transaction did not meet the New York Stock Exchange SPAC rules and what that meant was what I would call a dagger in the heart of the transaction.” Ackman was forced to return $4 billion to investors.

In response, the price of Directors and Officers insurance for SPACs was reported to have almost doubled by the end of 2020. Democratic legislators in the U.S. House of Representatives introduced the “Holding SPACs Accountable Act of 2021,” which would have excluded all SPACs from the safe harbor, and the “Protecting Investors from Excessive SPACs Fees Act of 2021,” which would have compelled the SEC to adopt a rule requiring SPACs to disclose compensation arrangements in the interest of transparency. While both pieces of legislation passed the Committee on Financial Services, neither became law. For its part, the SEC has increased its scrutiny of SPACs, tightened disclosure regulations, and clarified that the safe harbor applies only to private litigation action and not SEC enforcement.

After the SEC spiked his SPAC’s Universal deal in mid-2021, Ackman debuted a new take on the faltering investment vehicle, the SPARC. SPARCs do not require up-front money from investors like SPACs do. Instead of shares, SPARCs issue rights. Because the SPARC gives rights away, no money is held in trust. Once the acquisition target is identified, SPARC investors are given the chance to either walk away or opt in. Only if these investors approve the acquisition target and the amount that the SPARC is asking them to fork over (which will vary based on the size of the deal), can the deal close. At this point, the acquisition target gets the money and becomes public, and the SPARC rights transform into shares of the new public company. Importantly, SPARCs do not offer IPO warrants, which are used by SPACs as a way to enhance the capital raised in an IPO. This means that SPARC investors will not be diluted by such warrants and will therefore retain more of the company. Finally, SPARCs will have 10 years to complete an acquisition, in contrast to the 18 to 24-month period typically allocated to SPACs. 

Though the future of the SPARC remains uncertain, it appears to address several of the concerns that have imperiled SPACs. Most prominently, SPARC investors, unlike their SPAC counterparts, have the ability to hold back their investment while they evaluate the target. The increased control granted to SPARC investors also avoids the elimination of the safe harbor, and investors will have a greater chance to probe the specifics of the proposed acquisition. Lastly, SPARCs sidestep the share dilution endemic to SPAC compensation agreements, the precise concern underlying the “Protecting Investors from Excessive SPACs Fees Act of 2021.” The SPARC is accurately characterized as shifting risk from the investor to the sponsor, who must corral investors without the leverage that comes from holding a pool of money in trust. In early October 2023, Ackman announced that he had received SEC approval to use a SPARC to raise a minimum of $1.5 billion from investors for the acquisition of a private company.  Ackman seems to have bet that regulators will be more receptive to a model that simultaneously levels the informational playing field and endows investors with more discretion. Given his early victory in bringing the SPARC to fruition, it’s a wager that may have already begun to pay dividends.

The Future of Item 303-Based 10b-5 Claims

POMERANTZ MONITOR | NOVEMBER DECEMBER 2023

By Elina Rakhlin

A major unresolved question in securities litigation is headed back to the Supreme Court this term.  In Macquarie Infrastructure Corp. v. Moab Partners, L.P., SCOTUS will consider whether failing to disclose information required by Item 303 of the SEC’s Regulation S-K can support a private claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.  For plaintiffs seeking to hold companies accountable for misleading their investors by omitting material information from SEC filings, the stakes could not be higher.

Item 303’s Disclosure Duty and the Absence of a Private Right of Action

Item 303 requires that public companies include a Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section in their periodic SEC filings.  The MD&A must describe known trends, demands, commitments, events or uncertainties that are reasonably likely to materially impact the company’s financial condition or operating performance.  The SEC has made clear that Item 303 imposes an affirmative duty to disclose material information.  A company violates Item 303 by omitting information about a known trend or uncertainty that investors would consider important.

However, courts have widely recognized there is no private right of action under Item 303 itself—in other words, investors cannot sue directly for a company defendants’ nondisclosures.  Instead, plaintiffs are forced to seek recovery for these Item 303 violations within an existing securities fraud claim that does have a private right of action—most commonly, under Section 10(b) and Rule 10b-5.

This raises a key unsettled question–when does an Item 303 violation form the basis for an omissions case under Section 10(b)?

The Split: Can an Item 303 Violation Support a 10b-5 Claim?

To prevail on a Rule 10b-5 omission claim, plaintiffs must prove (1) the company had a duty to disclose, and (2) the omitted information was material.  All courts agree that violating Item 303 breaches the duty to disclose.  Where they diverge is whether an Item 303 violation, without more, makes the omission material for purposes of 10b-5.

Some circuits have held that Item 303 does not create a Section 10(b) duty to disclose.  The Ninth, Third and Eleventh Circuits have held that just because a trend or uncertainty should be included under Item 303 does not mean that omitting it is a violation of Section 10(b). In their view, an Item 303 violation alone cannot establish a 10b-5 claim.  Even if the omission breached Item 303, plaintiffs must separately prove materiality and scienter under 10b-5’s standards.

The Second Circuit disagrees.  It has held that omitting information required by Item 303 is “indeed an omission that can serve as the basis for a Section 10(b) securities fraud claim.”  Under this theory, violating Item 303 satisfies 10b-5’s materiality element automatically.  Plaintiffs need only adequately allege the other 10b-5 requirements, such as scienter.

This divide is pivotal given the broad consensus among the courts that there is no private right of action under Item 303.  As such, investors must look to Section 10(b) and Rule 10b-5 as one of their only avenues to obtain redress for Item 303 violations.  The Circuit split thus determines whether investors can hold companies liable at all for these omissions. 

This split also formed the basis for the Supreme Court’s 2017 decision to grant review in a case presenting the same question, Leidos Inc. v. Indiana Public Retirement System.  However, the case settled before oral argument.  Macquarie gives the Court an opportunity to finally resolve the split.

The Macquarie Litigation

In Macquarie, plaintiff Moab Partners brought 10b-5 claims against Macquarie Infrastructure and its executives.  Moab alleged that Macquarie concealed the known risk that impending regulatory changes restricting use of “high-sulfur fuel oil” in shipping would materially and adversely impact its storage and transportation business.  Specifically, Moab claimed Macquarie violated Item 303 by failing to disclose in its SEC filings the company’s significant exposure to high-sulfur fuel oil and the risks posed by the new regulations.

The district court dismissed the case, finding Moab failed to sufficiently allege either an Item 303 violation or scienter.  The Second Circuit reversed the district court’s decision.  Critically, it held that Macquarie’s omission of the fuel oil exposure and regulatory risks, in violation of Item 303’s disclosure duty, was sufficient to plead a material omission under 10b-5.  The court also found scienter adequately alleged.

Macquarie’s Petition for Certiorari

Macquarie petitioned the Supreme Court for certiorari on the question of whether the Second Circuit erred in holding that “a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b).”  Macquarie argues that this holding improperly expands liability under 10b-5 beyond what the statute and Court precedent permit. In its view, 10b-5 reaches only “deception”—i.e., misleading statements—not pure omissions of information that Item 303 requires be disclosed. Macquarie contends that the Second Circuit’s decision conflicts with Basic v. Levinson, which held that silence, absent a duty to disclose, is not misleading under 10b-5.  Macquarie argues that Item 303’s more expansive disclosure standards make it ill-suited to support 10b-5 liability, which requires materiality be plead with specificity under the PSLRA.

Macquarie further contends that allowing 10b-5 liability for Item 303 omissions will compel companies to make overly defensive disclosures and spur meritless litigation.  Macquarie claims that the Circuit split causes problematic forum shopping, with plaintiffs disproportionately bringing these claims in the Second Circuit.

Moab Partners’ Opposition

In its opposition brief, Moab first argues that Macquarie’s petition should be denied because the Leidos question is not as important as it once seemed.  It claims the Circuit split has proven “superficial,” with most courts dismissing Item 303-based claims on other grounds, such as immateriality or lack of scienter.

Moab defends the Second Circuit’s position as correctly reflecting 10b-5’s text and the principle that misleading omissions are actionable.  It argues that Item 303 creates a mandatory disclosure duty whose breach can mislead investors.  Moab distinguishes “pure omissions” from “half-truths,” arguing that Macquarie’s affirmative statements in SEC filings (like touting steady performance) also triggered a duty to disclose the Item 303 trend.

Finally, Moab argues that allowing 10b-5 liability for Item 303 omissions does not improperly expand the private right of action.  Plaintiffs must still plead and prove materiality, scienter, and all other 10b-5 elements.  Moab contends the robust 10b-5 requirements appropriately limit these claims.

What’s Next?

On September 29, 2023, the Supreme Court granted certiorari in Macquarie Infrastructure Corp. v. Moab Partners.  The case is currently set for oral argument on January 16, 2024.  For years, federal courts have disagreed on whether failing to make required Item 303 disclosures can support private securities fraud suits under Section 10(b) and Rule 10b-5.  The Supreme Court will likely finally resolve this dispute.

The Second Circuit allows these suits; the Ninth Circuit bars them unless plaintiffs show the omission also made affirmative statements misleading.  The Court cares about uniformity in federal securities laws, and the Second Circuit’s approach impacts markets nationwide; so the stakes are high.

Plaintiffs currently have an easier path bringing Item 303-based claims in the Second Circuit.  To plead such a claim there, plaintiffs must adequately allege: (1) defendants violated Item 303; (2) the omitted information was material; (3) defendants acted with scienter; (4) plaintiffs’ purchase/sale of the securities at issue; (5) plaintiffs’ reliance on the omission; and (6) the omission caused losses. 

The Ninth Circuit imposes more stringent requirements, in which plaintiffs are not only required to sufficiently allege those same elements but also show that defendants’ Item 303 nondisclosures made affirmative statements materially misleading.  This increased burden steers plaintiffs to the Second Circuit whenever possible.

If the Court sides with Macquarie, it will be harder for plaintiffs to hold companies liable for misleading omissions in periodic SEC filings.  Ruling for Moab keeps another tool in investors’ anti-fraud arsenal.  No matter the outcome, plaintiffs likely must meet heightened pleading standards for these claims going forward.  If the Supreme Court permits Item 303-based suits under 10b-5, plaintiffs still must rigorously allege facts supporting each element—especially materiality, scienter, and the PSLRA’s particularity mandate.  If the Court bars these suits absent misleading affirmative statements, the path forward is harder still.  Indeed, significant unknowns exist regarding the future of Item 303-based claims as the Court could impose greater requirements on investors seeking to bring these claims or issue a decision that produces more confusion than clarity, leaving the question open to further interpretation and differing applications of the law among the lower courts.  Either way, more vigorous pleading and tighter case screening is the future for Item 303-based 10b-5 actions.

Pomerantz to Host First European Corporate Governance Roundtable with Sir Tony Blair

POMERANTZ MONITOR | JULY AUGUST 2023

According to Pomerantz Partner Jennifer Pafiti, it all started in 2015 with an informal conversation among fiduciaries discussing securities litigation and the ways it could benefit their funds. “There were ten of us around a table. It was simply an opportunity to bring together professionals facing similar issues regarding the value of their pension funds and the beneficiaries they owed a duty to.” Iin the years since, that niche discussion has morphed into the Pomerantz Corporate Governance Roundtable, a highly anticipated gathering of decision makers in the worlds of law and institutional investing. Covering everything from ESG to the SEC, past Roundtables have been held in New York and California, with speakers that have included journalist Bob Woodward and former U.S. President Bill Clinton. This year, for the first time ever, the Roundtable will go international, kicking off in Rome in late October with former British Prime Minister, the Right Honourable Sir Tony Blair, slated to give the keynote address.

Given current trends in finance, and Pomerantz’s significant presence in Europe and deep-rooted history, Rome seemed the ideal location for the 2023 Roundtable. European regulators are at the forefront of ESG issues, a major concern to institutional investors, wherever they are situated. Also, global investing in various jurisdictions amidst changing regulations and evolving case law affects the day to day running of large institutional funds. For Pomerantz Director of ESG and UK Client Services, Dr. Daniel Summerfield, the global theme of the Roundtable is about increasing the scope of investor education. He brings up the example of SPACs, a rising trend in U.K. finance that seems to ignore the lessons learned in the U.S. “We want to keep this conference as global as possible,” says Summerfield, “because sometimes you run the risk of looking just within your own market and not looking overseas. That’s why governance has become a global activity – learning from best practice where it exists and learning from mistakes where they have occurred.”

A certain highlight of the roundtable will be the opportunity to hear from the Special Guest Speaker. Both Pafiti and Summerfield enthusiastically described the 2022 Roundtable, when Pomerantz Managing Partner Jeremy Lieberman interviewed former U.S. President Bill Clinton. “It was astonishing, you could hear a pin drop in that room,” recalled Summerfield. Even though politics was not the central subject of the conference, Pafiti found that President Clinton’s experiences during his time in office applied neatly to the world of corporate governance. She recounted Clinton’s discussion of his talks with an adversarial head of state as “laying the grounds for engagement as a tool before you start a war. It’s no different with our pension funds, engagement can be a useful tool in the world of governance before the big guns are brought out!” Summerfield sees the opportunity for similar insights with this year’s guest speaker, former British Prime Minister Sir Tony Blair. “They’re very close with one another, and the Blair-Clinton outlook on the world and geopolitics is similar. Their center-left ideology is pretty clear … and investor rights tend to be more associated with that center ground.”

Beyond the Special Guest Speaker, this year’s Roundtable features a host of notable panelists, including professors from Cambridge and the University of Glasgow, prominent investment managers and corporate lawyers, heads of ESG, and top executives from some of the most influential pension funds around the globe. Some of the panel topics will be familiar to attendees of previous Roundtables. This year will feature the return of “Unleash the Lawyers,” a popular session devoted to recent developments in case law and the ways litigation can serve as a tool for recovery as well as corporate engagement.

Other sessions have a more topical bent. There will be panels on the downfall of crypto currency and SPACs, a session on the fall of the Silicon Valley Bank, and a discussion of greenwashing. For Pafiti, this contemporary focus is one of the factors that sets the Pomerantz Roundtable apart from other conferences: “A lot of educational platforms won’t be talking about things that are happening in the moment because there is no conclusion, and the landscape might be changing in real time.” Pomerantz seeks to provide a forum to discuss developing issues as they’re occurring. To support this, the Roundtable has a strict “no press” policy and all conversations are held under Chatham House Rule, meaning any discussion can only be attributed to the group at large, not a specific speaker.

For Pafiti and Summerfield, it is this lively and unencumbered discussion among the participants that lies at the heart of the Roundtable. “From the very first Roundtable, it was important that the concept is led by our attendees and that is a theme we have continued,” explains Pafiti. “It’s peers who are speaking, they’re not only part of the discussion but they are leading it. It is very much guided by the desires of the conference attendees and the topics they want to hear about.” It is easy to see why Pafiti and Summerfield are so excited about participant discussions - the conference brings together CEOs, CIOs, CFOs, General Counsel, Trustees and Heads of ESG for some of the largest pension funds and asset managers across the globe. “We’re bringing together a diverse set of individuals: different backgrounds, different positions, different thoughts, different education, so that we have diversity of thought in the room, but it’s small enough that it’s still an intimate environment,” Pafiti explains. “It’s still a round table, just with a much larger table.”

For additional information or to reserve your place at this year’s event, please email pomerantzRoundtable2023@pomlaw.com.

Pomerantz Prevails Against Motion to Dismiss Its SPAC Litigation

POMERANTZ MONITOR | JULY AUGUST 2023

By Tamar Weinrib

Pomerantz, as sole lead counsel, recently won an important victory for investors in a securities fraud litigation against PureCycle Technologies, Inc., certain of its executives (collectively, the “PureCycle Defendants”), and Byron Roth. On June 15, 2023, Judge Byron of the Middle District of Florida denied defendants’ two motions to dismiss the Sections 10(b), 14(a), and 20(as) claims set forth in plaintiffs’ Second Amended Complaint, as well as defendants’ motion to strike, only dismissing the claims as to one of the five individual defendants.

PureCycle is a plastic recycling company that went public via a “de-SPAC” reverse merger with Roth CH Acquisition I Co., a special purpose acquisition company (“SPAC”). SPACs are shell companies set up solely to raise money through an IPO to eventually acquire another company. PureCycle had the dubious honor of being merely one in a long line of questionable reverse mergers Byron Roth has brought public, while misleading investors regarding the underlying business, only to slap a “buy” rating on the stock and collect millions in compensation, leaving innocent investors to suffer the consequences.

To date, PureCycle has never earned any revenue and has only one product -- a process it claimed could cost effectively recycle polypropylene, a common plastic that, since its invention in 1951, has stymied all efforts of the top scientists and chemical companies researching a way to effectively or economically recycle it. As the Court how now twice ruled (in the June 15, 2023 order and a previous order granting defendants’ motion to dismiss the First Amended Complaint in part), the PureCycle Defendants and Roth issued false and misleading statements throughout the November 16, 2020 - November 10, 2021 Class Period, claiming to have achieved the impossible. Specifically, defendants represented in proxy statements, a registration statement, and in press releases, that their recycling process is “proven” to convert waste polypropylene (called feedstock) into virgin polypropylene resin more cost effectively than manufacturing virgin polypropylene traditionally and utilizing a broader range of feedstock than traditional recycling. In reality (as multiple industry experts have attested), the technology underlying the process is unproven, presented serious issues at lab scale, could not be achieved cost effectively, and could not utilize a broader range of feedstock than traditional recycling. Defendants further touted the PureCycle management team -- which claimed to have solved the previously unsolvable polypropylene recycling problem -- as having “broad experience across plastics,” and decades of experience scaling early-stage companies in public markets and leading transformational projects, though they in fact had no background in plastics recycling and previously brought six other early-stage companies public that subsequently imploded, causing substantial investor losses. In the order, the Court held, “Defendants have failed to present any new argument that would cause the Court to reverse what it has already determined.”

The Court further held that plaintiffs sufficiently alleged scienter (a culpable state of mind) for purposes of the § 10(b) claim (the sole basis for the Court’s prior partial grant of defendants’ motion to dismiss the First Amended Complaint); Section 14(a), which is based on false and misleading statements in the proxy statements, does not require scienter. With regard to the PureCycle Defendants, the Court found scienter because the Second Amended Complaint avers with “greater specificity…the repeated instances wherein Defendants collectively and individually flaunted their past experience without disclosing their alleged prior business failings.” The Court reached this conclusion for two reasons: 1) the “shift in phrasing” demonstrating that “each Defendant individually ‘acted with the required state of mind’ by touting his own experience while omitting previous failures,” and 2) “Plaintiffs more precisely emphasize the repeated manner in which Defendants touted their experience.”

Though not determinative on its own, the Court also noted the PureCycle Defendants’ repeated “willingness to bolster their own credibility” as compared to their utter silence when their credibility was attacked in the short seller report that revealed the fraud in this case at the end of the Class Period, causing PureCycle’s stock to plummet 40%. As part of its holistic analysis, the Court also based its scienter ruling on defendants’ significant financial gain from the SPAC merger, access to internal company information, lack of experience with polypropylene recycling, and an SEC investigation that commenced in September 2021 “pertaining to, among other things, statements in connection with PureCycle’s technology, financial projections, key supply agreements and management.”

With regard to defendant Roth, the Court correctly rejected his piecemeal attacks and found scienter based on his “checkered history,” financial motive to act fraudulently, the “core operations” doctrine, Roth’s signing of the S-4, Schedule 14A (which contained the SPAC merger agreement), including the initial Proxy Statement and then later the amended Proxy Statement for Special Meeting of Stockholders of Roth Acquisition with the SEC which showed his “ongoing involvement with the SPAC merger over a period of several [pivotal] months,” and his access to information during that time including the “personnel, books, records, properties, financial statements, internal and external audit reports, regulatory reports, Contracts, Permits, commitments and any other reasonably requested documents and other information of [PureCycle Inc.], when Roth issued his misstatements.”

Defendants filed a motion on June 30, 2023 asking the Court to reconsider its order, claiming that “recent developments,” i.e., that PureCycle’s first plant just started producing “post-industrial recycled pellets” undermine plaintiffs claim. However, as plaintiffs argued in an opposition brief filed on July 14, 2023, the misleading statements set forth in the Second Amended Complaint pertained to the status of PureCycle’s technology almost two years ago, not the status of its technology today. Moreover, the misstatements concerned defendants’ claims that PureCycle could recycle polypropylene into virgin-like resin, more cost effectively than traditional recycling methods, and using a broader range of feedstock than traditional recycling. Defendants have not introduced a single fact to suggest that these recently produced pellets are virgin-like, produced more cost effectively than traditional recycling methods, or using a broader range of feedstock. In fact, less than a year ago, the FDA told PureCycle that it could only recycle polypropylene into packaging for food and drink as long as the feedstock comes solely from drink cups, the antithesis of a broad range. Defendants alternatively argued that the Court committed legal error in its scienter ruling, relying on new arguments they did not raise in their motions to dismiss (and thus are foreclosed from arguing now) and basing their arguments on mischaracterizations of the Order.

The discovery process is set to begin, and plaintiffs will file their motion for class certification in the coming months.

The Questionable Use of Free Speech Defenses in Securities Litigation

POMERANTZ MONITOR | JULY AUGUST 2023

By Villi Shteyn

Corporate actors trying to evade liability for fraud have used some questionable defenses, but the least credible may be trying to hide behind the First Amendment of the United States Constitution under the banner of free speech. The Supreme Court has stated that “the First Amendment does not shield fraud,” but that has not stopped companies from trying. This sets the backdrop for Massachusetts Attorney General Maury Healey’s suit against ExxonMobil Corp. (“Exxon”) brought in Massachusetts State Court back in October 2019.

The suit included claims that oil giant Exxon lied to consumers by marketing its products as environmentally friendly and, importantly, that Exxon misled investors by downplaying any climate-driven financial risks to its bottom-line financials. Specifically, the suit alleged that in the past, Exxon’s former CEO stated that the scientific evidence on climate change is inconclusive, as part of a campaign by Exxon to deceive consumers and investors despite decades-long internal knowledge to the contrary. The suit claims that Exxon more recently tells investors that climate change risks are a management priority, but its financial projections continue to deceive investors by asserting that virtually none of Exxon’s fossil fuel assets will be at risk. The complaint details how Exxon has internally analyzed and known these risks for over forty years but has failed to disclose them to investors. Instead, while publicly stating that the company accounted for climate change-related risks in its business planning, Exxon actually grossly undercounted such risks in its financials.

Exxon tried to claim that these statements, rather than being targeted to investors, were merely Exxon’s participation in the public discourse on a controversial issue of public concern and were directed at lawmakers or the public. This is despite the fact that examples included the statement that Exxon will “face virtually no meaningful transition risks from climate change.”

In a ruling issued last year, the Massachusetts Supreme Judicial Court rejected Exxon’s First Amendment defense to Attorney General Healey’s suit. The Court largely ignored the substance of the argument and simply found that Massachusetts’ anti-Strategic Lawsuit Against Public Participation (“anti-SLAPP”) law did not apply to civil enforcement proceedings brought by the state’s Attorney General, and that it was instead meant to block lawsuits brought by private actors. This ruling may leave private securities litigants wanting, but the Court did specify that the legislative history for the anti-SLAPP statute was meant “especially” for developers attempting to prevent local opposition to zoning approval.

Also, in positive news for investors, recent developments in the case law have shown courts to be highly skeptical and unconvinced by First Amendment defenses.

Ohio-based electrical utility company FirstEnergy Corp. also tried an extremely craven First Amendment defense in an investor class action. In a 2022 opinion, Chief Judge Marbley of the Southern District of Ohio found FirstEnergy’s First Amendment defense to strain[] credibility.” FirstEnergy attempted to argue, in a manner similar to Exxon, that corporations have a First Amendment right to speak on issues of public importance. But in this case, the supposedly protected statements were bribes. Specifically, this argument was made in the face of allegations of political contributions through the use of 501(c)(4) entities that were bribes to corrupt politicians and regulators. The court rejected this nonsensical argument and found that the bribery payments and deception of investors about the nature of the political activity undertaken by the company were not protected speech.

Similar First Amendment challenges have also failed in other securities fraud class actions, such as in a 2021 opinion in Pomerantz’s action in the Altria and JUUL securities fraud litigation in the Eastern District of Virginia. There, the court rejected use of the Noerr-Pennington doctrine for protections of petitioning activity because “the First Amendment offers no protection when petitioning activity ... is a mere sham to cover an attempt to violate federal law[,]” and fraud allegations under the Exchange Act raise this sham exception. A 2020 Northern District of California Court found similarly, despite the speech in question being a letter to Congress.

Judge Liman of the Southern District of New York issued a 2022 opinion equally unconvinced of this type of defense. In 2018, Tesla CEO Elon Musk agreed to a consent decree with the Securities and Exchange Commission (“SEC”) in the wake of settling charges by the SEC under the Exchange Act for false and misleading statements. The consent decree prevents him from communicating about Tesla without pre-approval by Tesla, to ensure the accuracy of the statements and consistency with what Tesla reports. In an attempt to terminate the consent decree, Musk argued that his First Amendment rights were intruded upon. However, Judge Liman found this argument wholly unconvincing and stated that Musk’s free speech rights do not allow him to engage in speech that is fraudulent or otherwise violates the securities laws. Judge Liman further found that the consent decree waived any First Amendment rights implicated. This decision was appealed to the Second Circuit of Appeals. The Second Circuit was no more receptive to the First Amendment argument and affirmed Judge Liman’s decision in a summary order.

Pomerantz has also had success in litigating a case involving statements relating to climate preparedness. In Vataj v. Johnson, settled favorably on behalf of defrauded investors in 2021, plaintiffs alleged false and misleading statements regarding a utility’s preparation and risk-minimization for wildfires.

            Thus, courts still view these dishonest First Amendment protections for what they are: pretextual rationalizations to try to evade liability for deceiving investors. It is well-settled law that the First Amendment does not protect fraud, and courts are unlikely to prevent investors from enforcing their rights to be protected from false and misleading statements under the false guise of free speech. While securities fraud defendants will certainly continue to use questionable tactics to attempt to shield themselves from liability for false or misleading statements, courts’ patience with these attempts, especially with the attempted use of the First Amendment, is wearing thin.

Navigating Section 220 Demand for Corporate Books and Records

POMERANTZ MONITOR | JULY AUGUST 2023

By Ankita Sangwan

Section 220 of the Delaware General Corporation Law (“Section 220”) grants shareholders the right to access corporate books and records, provided they fulfil the necessary “form and manner” requirements specified in the statute, and provided the demand is in furtherance of a “proper purpose.” Per Section 220, a proper purpose is one that is “reasonably related” to the shareholder’s interest as a shareholder. Most commonly, shareholders use Section 220 to investigate potential corporate misconduct, such as breaches of fiduciary duty by directors or officers, cases of mismanagement, corporate waste, or other wrongdoing, all of which have been recognized as “proper purposes” by Delaware courts. 

To proceed, a stockholder must demonstrate a “credible basis” for suspecting wrongdoing or mismanagement, which is the “lowest possible” burden of proof under Delaware law. While mere speculation, curiosity, and suspicions do not satisfy it, the threshold is satisfied through documents, logic, testimony, or otherwise demonstrating that there may be legitimate issues of wrongdoing or mismanagement. Further, the Delaware Supreme Court has affirmed that “where a stockholder meets this low burden of proof … [the] stockholder’s purpose will be deemed proper under Delaware Law” and that the stockholder “is not required to specify the ends to which it might use the books and records.” Thus, a stockholder is not required to demonstrate that the suspected wrongdoing it seeks to investigate is “actionable” under Delaware law. Once a stockholder establishes proper purpose and credible basis, they are entitled to access the relevant corporate books and records that are considered “necessary” to investigate the specific wrongdoing that the stockholder has identified in their Section 220 Request.

The Delaware Court of Chancery has encouraged stockholders to avail themselves of the ‘tools at hand’ and request company books and records before filing derivative complaints and has admonished plaintiffs when they have not attempted to gather reasonable information to substantiate their allegations before filing a derivative complaint. Section 220 has thus become a popular and widely used tool for stockholders seeking to investigate corporate wrongdoing and mismanagement. This wide usage of Section 220 has led to an evolution of Delaware’s jurisprudence reflecting judicial efforts to maintain a balance between the rights of stockholders to obtain information based on credible allegations of corporate wrongdoing and the rights of corporations to manage their business without undue interference from stockholders. The “credible basis” standard forms part of judicial efforts to maintain this balance. Courts have thus ruled against plaintiffs where investigations are deemed to be “indiscriminate fishing expeditions," and thus adverse to the interests of the corporation.

In “The Paradox of Delaware’s ‘Tools at Hand’ Doctrine: An Empirical Investigation,” published by Duke University School of Law in 2019, James D. Cox, Kenneth J. Martin, and Randall S. Thomas state that the results of their study “support[s] the positive social benefits of Delaware’s innovative tools at hand doctrine.” In recent years, they found, a trend emerged with defendants increasingly treating Section 220 actions as a “surrogate proceeding to litigate the possible merits of the suit” and to “place obstacles in the plaintiffs’ way to obstruct them from employing it as a quick and easy pre-filing discovery tool.” Courts have reprimanded corporations that use such “overly aggressive” litigation tactics while responding to Section 220 demands. Pomerantz has successfully litigated against such defense campaigns by different corporations. In a case filed against Biogen where plaintiff sought to investigate potential corporate wrongdoing and mismanagement arising from a federal investigation and a former employee’s allegations in a wrongful termination suit, the Delaware Court of Chancery noted that Biogen followed “the recent trend in adopting what has been referred to as an “overly aggressive defense strategy” in opposing inspection and granted plaintiffs access to board-level materials.

In another instance, Pomerantz, along with two other firms, filed a complaint against Gilead, when Gilead employed similarly aggressive strategies against plalintiffs’ Section 220 demands. The purpose of these demands was to investigate possible wrongdoings concerning the production, marketing and sales of Gilead’s HIV drugs. In her decision, Chancellor McCormick (Vice Chancellor at the time) noted that “Gilead exemplified the trend of overly aggressive litigation strategies by blocking legitimate discovery, misrepresenting the record, and taking positions for no apparent purpose other than obstructing the exercise of Plaintiffs’ statutory rights.” Chancellor McCormick also found that Gilead’s approach called for fee-shifting since Gilead had engaged in bad faith conduct. Ultimately, defendants were sanctioned and ordered to pay Pomerantz and other plaintiffs’ counsel $1.76 million in attorney’s fees.

Another emerging trend is that stockholders are using Section 220 demands to investigate a company’s commitments to diversity and other ESG concerns. In Asbestos Workers Phila. Welfare & Pension Fund v. Scharf, No. 3:23-cv-1168 (N.D. Cal. Mar. 15, 2023), shareholders relied on information and documents received pursuant to a Section 220 demand to allege that the Wells Fargo Board disregarded “pervasive issues of discrimination” and further alleged that the bank conducted fake interviews with minority candidates. Similarly, a Tesla stockholder relied on Section 220 documents to allege that the Tesla Board fostered a company culture of tolerating sexual harassment and racial discrimination.

In a recent case on this issue, Simeone v. The Walt Disney Company (Del. Ch. June 27, 2023), the Delaware Court of Chancery rejected an action filed by a Walt Disney stockholder seeking to compel inspection of books and records relating to the company’s opposition to Florida’s “don’t say gay” law – in a stance that allegedly caused Florida’s Governor and state legislature to retaliate against the company by stripping it of special state-granted tax treatment and other benefits. In ruling against the stockholder, the Court held that he had not established a proper purpose for his Section 220 demand because the stated purpose belonged to the stockholder’s counsel, rather than to the stockholder himself. The stockholder testified that he had been solicited to make the Section 220 demand and had been put in touch with the Thomas More Society, a “public interest law firm championing Life, Family, and Freedom.” He also testified that his only purpose in requesting inspection was to “know the person or persons who were responsible for making th[e] political decision at Disney to publicly oppose” the law. The Court also held that  “[t]he plaintiff is not describing potential wrongdoing.  He is critiquing a business decision.  A stockholder cannot obtain books and records simply because the stockholder disagrees with a board decision, even if the decision turned out poorly in hindsight.” The Court further explained that a corporation’s “choosing to speak (or not speak) on public policy issues is an ordinary business decision,” even if the topic is a “divisive” one, and even if it is “external to [the company’s] business.” The Court concluded that “At bottom, the plaintiff disagrees with Disney’s opposition to [the Florida law]. He has every right to do so. But disagreement with [a] business judgment is not evidence of wrongdoing warranting a Section 220 inspection.”

The Walt Disney case differs from the other decisions and is interesting for several reasons, one being that it focuses on the stockholder’s – not their lawyers’ – purpose, and emphasizes that even if an alleged bad corporate decision has been made, it does not necessarily mean that a wrongdoing at the level of a breach of fiduciary duty occurred. Delaware Courts have consistently emphasized that “bad” or “misguided” business decisions that do not involve legal violations typically do not qualify as breaches of fiduciary duty. Furthermore, there have been discussions among courts and experts questioning whether such decisions can be considered breaches of fiduciary duty if they are not connected to any legal violations. In any event, these spates of decisions highlight the growing trend of ESG-related litigation, which continues to be bolstered by Section 220 requests.

Given the popularity of Section 220 requests and their usefulness in investigation of corporate wrongdoings, it will be interesting to see how these trends develop and evolve.