Event-Driven Securities Litigation: an Interview with Marc I. Gross

Whether you’re an influencer, a politician, or a corporation, reputation impacts your livelihood. In the Spring 2024 issue of The Business Lawyer, Marc I. Gross published a paper rebutting Columbia Law Professors Merritt Fox and Joshua Mitts’ “Event Driven Suits and the Rethinking of Securities Litigation,” published in the Winter 2022-2023 issue of the same journal. Marc met with Brett Lazer of the Monitor to discuss why a company’s reputation is a key factor often missed by the courts when assessing the impact of misleading statements on stock prices, and the consequences thereof for measuring damages in securities fraud class actions.

The Pomerantz Monitor

Your article focuses on “event-driven securities litigation.” Perhaps you can explain what that is and the debate surrounding it.

Marc I. Gross

It’s a term Professor John Coffee of Columbia coined about 10 years ago to describe cases filed following major catastrophes, such as BP’s Deepwater Horizon oil rig explosion. The debate is whether the same rules should apply to these cases as to financial misstatement cases, because event-driven cases deal with an undisclosed, not a misstated, result. For example, in a case that Pomerantz successfully pursued against BP, the company had a series of catastrophes prior to the oil rig explosion. BP asserted it had implemented a remedial program, but failed to disclose that the program did not apply to high-risk offshore drilling. The court found that BP’s prior pattern of misconduct, combined with its failure to disclose the degree of risk investors actually faced, supported a securities fraud claim. In recent years, event-driven litigation has expanded from similar catastrophes to cases where a company was suddenly found to have engaged in other types of misconduct. Such as the dark pool trading platform at issue in Pomerantz’s case against Barclays, or the ABACUS transactions that John Paulson engaged in with Goldman Sachs, which were referenced in the film The Big Short.

In their article, Fox and Mitts argue that event-driven cases should be categorized separately and analyzed under a different set of rules, including imposition of much higher pleading burdens on plaintiffs. Frankly, I don't think they want to limit such rules to catastrophes. I think they see their proposals as a means to recast what they think is wrong in securities fraud litigation.

Monitor    

What is the argument of the Fox and Mitts’ piece?

MIG          

They say that in event-driven cases, if not most securities cases, the court should not focus on how stock prices reacted when the wrongdoing was disclosed, but on the price impact had the company said nothing at the outset. In other words, to determine damages, the court should focus on stock prices at the time the misconduct first occurred, not when the misconduct was revealed. In the Barclays case, the bank had serious prior violations related to certain trading platforms, and they said, “For our new ‘dark pool’ trading, we've now taken remedial measures to ensure customers are protected and there are no abuses,” which, in fact, they hadn’t. Fox and Mitts’ thesis is that in assessing price impact, the court shouldn't look at what happened when investors learned that Barclays’ statements were misleading, but how the market would have reacted had there been no statements about the dark pool trading at the outset, on the assumption that the company did not have to volunteer such information.

Monitor    

You say this misses a key function of these kinds of corporate utterances.

MIG          

These statements are made to burnish a company’s reputation and assure investors that past misconduct has been remediated. My argument is that courts fail to give sufficient weight to the degree to which a company's reputation impacts the stock price at the time misstatements are made. There's empirical evidence showing that a significant portion of any stock price is attributable to reputation. Marty Lipton [a founding partner of law firm Wachtell, Lipton, Rosen & Katz] suggests it’s 50%. That makes sense because companies are essentially brand names. Their value is based on what investors think their profitability will be, but also on perceptions of the management’s integrity. Investors don't like surprises, so they will invest in stocks based upon an assumption of reliability and truthfulness. We have this whole theory of fraud on the market - what else is the market doing but presuming a degree of credibility and reliability of management? Investors assume such factors are baked into the stock price. So when a company discloses misconduct, or incurs a catastrophic event, and the stock price plummets, studies have shown that the size of the decline is often disproportionate to the amount that the stock would have fallen had the company simply been truthful in the first instance. If a company says, “Instead of earning $1 we only earned $0.75,” you might expect a 25% decline based on historic price/earnings ratios. In fact, studies show that stock will actually fall over 50%. What accounts for that additional decline? As cited in my article, Professor Karpov and others have empirically shown the additional decline is attributable to the market reassessing the reputational risk of the company.

Monitor    

One of the examples you use to illustrate this effect is Wells Fargo. Can you take us through what happened in that case?

MIG          

Wells Fargo had a sterling reputation, selling at a higher price-to-earnings ratio than its competitors. The bank touted its “synergy” practices, such as getting checking account customers to invest in other types of accounts. These “synergies” helped the bank distinguish itself from its competitors. Then suddenly investors learned that Wells Fargo’s bankers were engaging in abusive practices to meet “goals”:  at the end of the quarter, transferring money from customers’ accounts into others, and then reversing the transactions. Sometimes customers lost money due to overcharge fees, sometimes they didn’t. It didn't add much to profits or revenues. This wasn’t Enron, where earnings were being faked. Wells Fargo was still making billions of dollars in profits. Indeed, when these abusive practices were disclosed, it paid only a $185 million fine, a drop in the bucket for the bank. Nonetheless, the stock price cratered by $30 billion within a month. That's an indication that the market reassessed the reliability of management. The market was prescient because it turned out that Wells Fargo was doing this with car loans, insurance and other products. Boeing currently is an extreme example of such misconduct. It didn’t cook the books like Enron, but it cratered its own planes by pushing profits before safety.

Monitor    

This gets back to the issue of a company’s statements. One supposes Boeing couldn’t come out and say it was skimping on safety to maximize profits.

MIG          

It’s a good question, because the courts have asserted, and properly so, that a company doesn't have to accuse itself of criminal misconduct. At the end of the day, it's not about merely saying that you’re taking action to improve safety as Boeing did, it’s whether you are actually doing it, which it was not. For Fox and Mitts, these situations don’t constitute securities fraud because there was no requirement to volunteer information about safety practices. Rather, the professors categorize this as only a breach of a fiduciary duty of care for which derivative claims exist as a remedy. In a sense this is correct, because directors have a fiduciary duty, under the Caremark case in Delaware, to make sure remedial measures are, in fact, being implemented. We could certainly bring a derivative case against Boeing. The problem with derivative cases is that they take money from the directors and put it back into the company without necessarily helping shareholders who lost millions when they sold shares following disclosure of the wrongdoing.

Monitor    

Fox and Mitts suggest that any function served by private securities litigation would be better addressed by derivative cases, regulatory criminal prosecutions, or SEC enforcement, but you claim these remedies are insufficient. Why?

MIG          

Historically, the SEC's recoveries are limited to collecting fines, not damages incurred by investors. In fact, studies by John Coffee and others show that private litigants recover 10 times the amount that the SEC gets in their cases. So first, it’s a matter of compensation. Second, the SEC simply doesn't have the resources to pursue all these claims. The SEC and the Supreme Court have long recognized that securities litigation firms function as private attorneys general. We play a complementary role. With better resources, could the SEC actions one day be sufficient? I’m not convinced. At a certain point it becomes political. Congress has a vested interest in this system, and so without private actors there will always be political concerns that interfere with justice being carried out.

Pomerantz Settles Ground-Breaking Case Against Perrigo for $97 Million

By the Editors

Pomerantz is always willing to pursue cases as far as the law and facts permit in order to achieve a favorable recovery for investors. In the Firm’s securities litigation against the pharmaceutical company Perrigo Co. plc (“Perrigo”), this entailed nearly seven years of litigation before three different judges, over 30 depositions, and review of over half a million documents. The result was worth the wait: in April 2024, Pomerantz’s efforts culminated in a $97 million settlement on behalf of defrauded investors. In addition, the case made ground-breaking new law that expands global investors’ rights.

Perrigo is one of the largest global manufacturers of over-the-counter healthcare products and both generic and branded drugs. The case focused on Perrigo’s botched integration of its largest acquisition ever, Omega Pharmaceuticals, and of alleged anticompetitive conduct in Perrigo’s generic drugs unit. Plaintiffs alleged that Perrigo and some senior officers and directors made misrepresentations about these topics to thwart a hostile takeover attempt in 2015 by competitor Mylan, Inc., and continued to do so for a few months after the tender offer expired in November 2015. Specifically, to discourage Perrigo investors from tendering shares, defendants allegedly concealed problems with the integration and performance of Omega, as well as a price-fixing scheme that boosted the results of Perrigo’s generic drug division. The tactic worked. Only 40% of Perrigo shareholders tendered shares, below the 50% threshold needed to consummate the merger. Approximately three months later, Perrigo began to reveal the truth about problems in Omega, ultimately taking more than $2 billion in impairment charges. Perrigo also admitted that the return of competition in topical generic drugs hurt the performance of that division. Longtime Chief Executive Officer Joe Papa left Perrigo to take a position at troubled Valeant Pharmaceuticals.

The initial complaint was filed in May 2016, just after Papa fled the company. Pomerantz’s institutional investor clients Migdal Insurance Company Ltd., Migdal Makefet Pension and Provident Fund Ltd., Clal Insurance Company Ltd., Clal Pension and Provident Ltd., Atudot Pension Fund for Employees and Independent Workers Ltd., and Meitav DS Provident Funds were appointed lead plaintiffs in August 2016.

Perrigo revealed further problems in the months that followed, and in May 2017, federal officials raided the company’s Michigan headquarters to execute a search warrant related to a generic drug price-fixing investigation. In June 2017, Pomerantz filed a robust amended complaint addressing both the initial claims and new claims based on these developments. About a year later, U.S. District Judge Madeline Cox Arleo of the District of New Jersey sustained the core claims related to misrepresentations about Omega and Perrigo’s generic drug practices. Other less significant claims were dismissed.

This case set important precedents that effectively stem the fallout for investors from the Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, Ltd. That decision appeared to close the door of U.S. federal courts to investors who purchased securities on foreign exchanges, reasoning that the Securities Exchange Act of 1934 was not intended to have extraterritorial effect. Morrison was particularly limiting for investors in cross-listed (also known as dual-listed) shares, a staple of most global portfolios. Cross-listed shares are traded both on U.S. and foreign exchanges, affording institutional investors the opportunity to execute trades on the venue offering the most favorable trading hours, pricing, and liquidity at any given moment. Under Morrison, two purchasers of the same cross-listed stock at the same time injured by the same fraudulent misrepresentations and omissions might have very different remedies, depending on the trading venue. U.S. purchasers could join together with other similarly situated investors to collectively seek compensation in a U.S. class action, while purchasers on the foreign exchange, under Morrison, were left to pursue claims individually in a foreign court.

The Perrigo action offered the perfect opportunity to test the bounds of Morrison. Perrigo was listed both on the New York Stock Exchange (“NYSE”) and the Tel Aviv Stock Exchange (“TASE”), and had elected under the Israel Securities Act to have its disclosure obligations in Israel governed by the standards of its country of primary listing – in this instance, the United States – rather than by Israeli standards. Because of that election, Israeli law applied the standards of Section 10(b) of the Securities Exchange Act of 1934 to assess claims of securities fraud. Accordingly, Pomerantz argued that in addition to a class of U.S. investors, a parallel class could be recognized addressing the claims of Israeli purchasers applying the same standards.

Pomerantz brought claims under Israeli law applying the Section 10(b) standard for TASE purchasers, as well as traditional claims under U.S. law for U.S. purchasers. In its opinion sustaining the core parts of the amended complaint over motions to dismiss, the Court held that supplemental jurisdiction was properly exercised over the TASE purchaser claims, noting that they applied the same standards as the claims asserted under U.S. law.

In its November 2019 decision, the Court positively affirmed Pomerantz’s groundbreaking strategy, certifying classes of NYSE and TASE purchasers. In doing so, the Court analyzed Pomerantz’s evidence regarding the efficiency of the TASE market, finding that the market for Perrigo securities on the TASE was sufficiently liquid and responsive to information to trigger the presumption of reliance under Basic Inc. v. Levinson. This marked the very first time since the Morrison decision that a U.S. Court has independently analyzed the market of a security traded on a non-U.S. exchange and found that it met the standards of market efficiency necessary to allow for class certification, and so set an important precedent for global investors. Following this pivotal ruling, the defendants attempted to unravel class certification by seeking interlocutory appeal, but the United States Court of Appeals for the Third Circuit rejected their petition.

Discovery was lengthy and challenging. Between the summer of 2018, when the discovery stay was lifted, and late 2020, Pomerantz obtained and reviewed millions of pages of documents, and took or participated in over thirty fact witness depositions. This discovery yielded solid evidence supporting plaintiffs’ Omega claims, and circumstantial evidence of anticompetitive practices in Perrigo’s generic drug division. The early 2018 death of a key witness who was a generic drug sales executive at Perrigo, and the United States Department of Justice’s intervention to halt depositions of witnesses it believed to be important to the government’s price fixing investigation, both played a role in constraining discovery.  

In June 2021, just as the parties were finishing briefing defendants’ motions for summary judgment, the case was reassigned to U.S. District Judge Julien X. Neals. Judge Neals held oral argument in April 2022, which lasted for more than seven hours. However, in the fifteen months that followed, he did not issue a decision. In July 2023, Chief District Court Judge Renée Marie Bumb reassigned the case (and the long-languishing motions for summary judgment) to herself. A month later, she issued a split decision, sustaining most of the Omega claims against Perrigo and Joseph Papa, ordering further briefing and argument on the generic drug-related claims against Perrigo, and granting summary judgment dismissing other claims. Chief Judge Bumb then ordered the parties to mediate. In April 2024, after several mediation sessions, the parties agreed to resolve all claims for a cash payment of $97 million.

“We are proud to have achieved this above-average recovery despite the considerable defenses raised in this action,” Partner Joshua Silverman, who ran the action for Pomerantz along with Managing Partner Jeremy Lieberman, said. “In addition to the headline number, we were pleased to create new law that will benefit global investors in the years to come.” 

Delaware Proposes Dramatic Corporate Law Amendments in Response to Moelis Decision

In response to a recent landmark decision by the Delaware Court of Chancery, Delaware’s legislature may be poised to pass sweeping amendments to Delaware’s General Corporation Law (the “DGCL”). These amendments could potentially hand over power from a board to a corporation’s largest shareholders, which would affect the rights of all the corporation’s investors.

The DGCL governs the fiduciary duties of the officers and directors of most publicly traded companies in the United States. As such, the Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for the determination of disputes involving the DGCL, including stockholder class and derivative lawsuits alleging breaches of fiduciary duty.

These proposed amendments to the DGCL, released on March 28, 2024 by the Council of the Corporation Law Section of the Delaware State Bar Association, are expected to be introduced to the Delaware General Assembly for approval this year.

They are an attempt to legislatively overrule the Delaware Court of Chancery’s February 23, 2024 decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., which primarily concerned DGCL Section 141(a). That provision states that “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” Among other things, Section 141(a) polices external agreements entered into by a board of directors, prohibiting a board from contracting away its duties in private agreements with third parties.

The Moelis case concerns just such agreements. The day before shares of Moelis & Company (Moelis & Co.”), a global investment bank, began publicly trading following its IPO, the company’s board of directors (“Board”) entered into agreements directly with the company’s Chairman, Chief Executive Officer and Founder Ken Moelis, requiring Mr. Moelis’ prior written consent before the Board could take 18 categories of actions (the “Pre-Approval Requirements”). The Court of Chancery characterized the Pre-Approval Requirements as broad and encompassing “virtually everything the Board can do.” In addition to the Pre-Approval Requirements, the Board also entered into a number of other agreements with Mr. Moelis, giving him the right to, among other things, nominate a set number of Board members. Mr. Moelis was also given the right to include at least one of his nominees on all Board committees, effectively ensuring that no Board committees would be entirely independent from Mr. Moelis unless he waived his right to include his Board nominee on the committee.

A company stockholder filed suit in the Delaware Court of Chancery, alleging that the various agreements entered into between Mr. Moelis and the Board violated, among other things, Section 141(a). Ultimately, the Moelis court found that the Pre-Approval Requirements “mean that [Mr.] Moelis determines what action the Board can take. The directors cannot exercise their own judgment. They must check with Moelis first and can only proceed with his approval.”  Accordingly, the Board required pre-approval from Mr. Moelis before taking virtually any meaningful action, effectively giving Mr. Moelis control over the Board. The court found that, with the Pre-Approval Requirements in place, the Board was not really a Board. The directors only manage the company to the extent Moelis gives them permission to do so.

The court was unpersuaded by the Board’s defense that the agreements with Mr. Moelis represented a private contract between the Board and a stockholder. The court drew distinctions between contracts that companies necessarily enter into in the ordinary course of business, and the governance-related agreements entered into by the Moelis & Co. Board. The court also noted that the agreements with Mr. Moelis were entered into directly with the Board, as opposed to typical agreements entered into with a corporation.

In addition to striking down the Pre-Approval Requirements, the court also found that the agreements requiring a nominee of Mr. Moelis to appear on Board committee was unenforceable and violated Section 141. The court found that determining the composition of board committees falls within the Board’s authority. A stockholder cannot determine who comprises a committee.

Not all of the agreements with Mr. Moelis were found to violate Delaware law. The court found that it was permissible for the Board to allow Mr. Moelis to nominate designees for the Board. However, the court conditioned this right by noting that “what the Board or the Company does with those candidates is what matters.”  Mr. Moelis could nominate his designees at a stockholder meeting, and the company can agree to facilitate that process, so long as the Board is not compelled to recommend Mr. Moelis’ designees for election.

The court also struck down other agreements regarding the size and composition of the Board. By way of example, the court found that the Board could not enter into an agreement with Mr. Moelis to fill a vacancy created by a departing Mr. Moelis designee with another Mr. Moelis designee. The court also found that it was improper for the Board to agree that it would not increase the number of Board seats beyond eleven, an agreement meant to prevent the Board from diluting the control of Mr. Moelis’ nominees to the Board.

The court made it clear that alternative avenues exist for the Moelis & Co, Board and other boards seeking to enter into similar agreements with significant stockholders, noting that many of the invalidated agreements would have been valid if they were found in the Certificate of Incorporation as opposed to private agreements. The court also noted that revising a Certificate of Incorporation need not be an onerous process. The Moelis & Co. Board could, in theory, use its blank check authority to issue Mr. Moelis “a single golden share” and grant that preferred stock a set of voting rights and director appointment rights. The certificate of designations for the new preferred stock would become part of the Certificate of Incorporation as a matter of law, resolving many of the court’s concerns regarding the agreements. The court acknowledged that some might find it “bizarre” that the DGCL would prohibit one means of accomplishing a goal while allowing another.

The court also appeared to anticipate the potential for its decision to create upheaval, acknowledging that many other Delaware corporations had entered into agreements that were similar to the agreements that it struck down in the Moelis opinion. The court acknowledged that “[c]orporate planners now regularly implement internal governance arrangements through stockholder agreements,” and that such agreements “contain extensive veto rights and other restrictions on corporate action.”  However, the court was constrained by the mandates of Section 141(a), noting that “a court must uphold the law, so the statute prevails [over the private agreements].”

The uncertainty created by Moelis boiled over on May 24, 2024, when proposed amendments to Delaware’s corporate code were introduced that threaten to upend Section 141(a) and alter the relationship between stockholders and Delaware corporations. The proposed amendments, which were assigned to the Delaware Senate Judiciary Committee, would effectively reverse the Moelis decision by giving Delaware boards greater ability to enter into similar agreement to those that were struck down in Moelis. The proposed amendments would permit a board to enter into agreements with current or prospective stockholders similar to those that were rejected in Moelis, provided that the amendments do not otherwise violate Delaware law. Specifically, the amendments state that the corporation may agree in a contract with a stockholder to: (a) restrict or prohibit itself from taking actions specified in the contract, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). Unless amended, the proposed amendments will allow Delaware corporations to more easily contract away traditional corporate powers to large stockholders.

By Samuel J. Adams

DOJ Rolls Out Pilot Program for Voluntary Disclosures

By James M. LoPiano

On April 15, 2024, the U.S. Department of Justice’s (DOJ) Criminal Division unveiled its Pilot Program on Voluntary Self-Disclosures for Individuals. Under this Pilot Program, the Criminal Division may offer non-prosecution agreements (NPAs) to individuals who voluntarily disclose original information about certain types of criminal conduct to the DOJ. In addition to providing a clear framework that encourages employees to speak up about wrongdoing and incentivizes companies to shore up their compliance protocols, the program may have a positive impact on securities litigation.

The Pilot Program is meant to aid the DOJ in its fight against corporate malfeasance by incentivizing financial institutions and corporations to enhance their compliance efforts, while simultaneously increasing pressure on their employees to self-disclose certain forms of misconduct.

To be eligible for an NPA under the Pilot Program:

1.       The disclosure must be made to the DOJ’s Criminal Division;

2.       The reporting individual must disclose original information about certain types of misconduct;

3.       The disclosure must be voluntary;

4.       The disclosure must be truthful and complete;

5.       The reporting individual must agree to fully cooperate with and be willing and able to provide substantial assistance to the DOJ;

6.       The reporting individual must agree to forfeit or disgorge any profit from the criminal wrongdoing and pay restitution or victim compensation; and

7.       The reporting individual must not meet certain disqualifying criteria.

What is “original” information?

Original information is non-public information that was not previously known to the Criminal Division or to any other component of the DOJ. Accordingly, the Pilot Program is focused on uncovering new criminal activity, rather than supplementing ongoing investigations with new information. Because the information must be original, only the first person to bring the wrongdoing to the DOJ’s attention will be eligible for the NPA, and only while the wrongdoing remains unknown to the public.

What types of criminal activity must the information relate to?

Essentially, the disclosed information must relate to white-collar crimes, such as schemes involving money-laundering, fraud, bribery, corruption, or kickbacks. The crimes must be committed by organizations (or their insiders or agents) whose conduct is important to maintaining the integrity of the financial and securities markets, such as banks, large public or private companies, or investment funds and advisors.

What is a “voluntary” disclosure?

A voluntary disclosure is made without any prompting by the DOJ or other federal law enforcement or regulatory bodies, without the risk of imminent disclosure to the public or government, and in the absence of an ongoing investigation. As such, the voluntary disclosure requirement supports the Pilot Program’s goal of seeking out only previously unknown information, with the aim of rooting out wrongdoing that would not otherwise have come to the DOJ’s attention.

What is a “truthful and complete” disclosure?

A truthful and complete disclosure includes all known information related to the misconduct, including the full extent of one’s own involvement in the wrongdoing and any other matters about which the DOJ may inquire. In practical terms, once you report information to the DOJ, you must disclose everything you know about the wrongdoing in question; partial tips go unrewarded.

What does it mean to “fully cooperate” with and provide “substantial assistance” to the DOJ?

Fundamentally, a reporting individual must be willing to become an evidence-producing vehicle for the DOJ. The reporting individual must be willing to help the DOJ gather evidence (potenitally even wearing a wire to work), provide truthful and complete testimony during interviews or in court, and produce documents, records, and other evidence.

Who is disqualified from the Pilot Program?

Individuals occupying certain roles or who have committed certain crimes are disqualified from participating in the Pilot Program. Some of these individuals are obvious, such as a scheme’s organizer or leader. Others appear to be disqualified to achieve a purpose-driven result. For example, elected or appointed foreign government officials, as well as domestic government officials at any level, are ineligible for an NPA. In this way, the Pilot Program excludes individuals who are often targeted by corporate wrongdoers to facilitate white-collar crimes: a city official overseeing the bidding process for a lucrative government contract; a regulator responsible for green-lighting a new facility or product; or an administrative functionary issuing business permits to foreign companies. By preventing these individuals from availing themselves of the Pilot Program, the DOJ deters them from engaging in the crimes that the Pilot Program is focused on, such as fraud, bribery, and corruption.

Other examples of individuals disqualified from the Pilot Program include an offending  corporation’s Chief Executive Officer or Chief Financial Officer (or those occupying an equivalent role); anyone with a previous felony conviction or a conviction of any kind for conduct involving fraud or dishonesty; and anyone with a criminal history involving violence, use of force, threats, substantial patient harm, any sex offense involving fraud, force, or coercion, or relating to a minor, or any offense involving terrorism.

How might the Pilot Program help uncover corporate wrongdoing?

The Pilot Program facilitates and rewards prompt and proactive disclosures by those aware of or involved in corporate wrongdoing. As discussed above, those who wait until an investigation begins or who come forward after someone else has done so, will not be eligible for an NPA under the Pilot Program. The Pilot Program’s original information requirement has essentially created a race-to-the-DOJ: once any facet of the DOJ becomes aware of the wrongdoing, whether from the corporation itself, one of its many employees, or an outside source such as a news organization, one cannot satisfy the Pilot Program’s criterion for originality. Similarly, because of the Pilot Program’s voluntary disclosure requirement, once an internal company investigation begins, it is likely too late to seek an NPA under the Pilot Program. This means that anyone involved in or otherwise aware of the wrongdoing is incentivized to report to the DOJ first to secure an NPA to the exclusion of everyone else.

For the same reason, corporations are more incentivized in the first instance to shore up their compliance efforts. Because the Pilot Program encourages employees to report suspected corporate wrongdoing to the DOJ before, for example, a company’s own HR department or compliance hotline—which might kick off an internal investigation by the company and disqualify employees from the Pilot Program—the company and its management will presumably put more effort into preventing or detecting wrongdoing, as opposed to merely relying on internal reporting structures.

What does the Pilot Program mean for securities litigation?

If the Pilot Program is successful, then the DOJ will presumably announce more investigations into and/or file more complaints against offending corporations. If this causes a company’s stock price to fall, a securities fraud class action becomes a potentially viable route for redress for harmed investors.

Some of the Pilot Program’s requirements lend themselves well to securities litigation. For example, securities fraud class actions often hinge on showing that an event, usually a disclosure of some kind, prompted a company’s share price to fall, and that this share price decline was the result of the market digesting new information about the company and baking that information into the company’s share price. Accordingly, if a securities fraud class action follows from a DOJ investigation, which itself follows from a disclosure under the Pilot Program, the Pilot Program’s original information requirement can help litigators verify that a disclosure or event revealed new information to the market. Further, a reporting individual’s testimony under the Pilot Program may aid lawyers in their discovery (i.e., evidence-gathering) efforts by, for example, helping them narrow down which department or individuals of an organization were most likely involved in or aware of the wrongdoing in question, while simultaneously helping them avoid deposing those departments or individuals unlikely to be implicated in or exposed to the wrongdoing.

In sum, the Pilot Program is a promising new tool for the DOJ to employ in its fight against corporate and financial malfeasance. It also presents a greater opportunity for both the public and private sectors to investigate corporate bad actors and hold them accountable.

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.