Keep Looking Forward: Federal Court Holds Company’s Bad Legal Predictions Protected by PSLRA’s Safe Harbor

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In a comprehensive tour of the Private Securities Litigation Reform Act’s (“PSLRA”) safe-harbor provisions, on November 22, 2016, a federal court in Massachusetts dismissed a shareholder class-action lawsuit against Neovasc, Inc.  In holding that Neovasc’s ultimately faulty predictions concerning the outcome of a trade secrets lawsuit fell within the PSLRA’s safe harbor, the court rejected the plaintiff’s attempts to import a scienter requirement into the safe-harbor inquiry, among other things, and dismissed the complaint without leave to amend.

This putative class-action came on the heels of a $70 million jury verdict against Neovasc in May 2016. In that case, a jury found that Neovasc misappropriated certain trade secrets from CardiAQ Valve Technologies after CardiAQ had severed its manufacturing relationship with Neovasc, and Neovasc had patented a competing product.  Neovasc’s stock price fell approximately 75 percent when the jury verdict was announced.  Shortly after the verdict and stock decline, shareholders filed the class action, alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The plaintiff alleged, among other things, that prior to the verdict, Neovasc CEO Alexei Marko mischaracterized the lawsuit as “baseless,” and that Neovasc had misstated that the suit was “without merit” in the company’s SEC filings.

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Ninth Circuit Smells a Rat and Reinstates Claim That Pharmaceutical Company Failed to Disclose Cancers in Animal Testing

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The Ninth Circuit recently revived a securities class action against Arena Pharmaceuticals, issuing a decision with important guidance to pharmaceutical companies speaking publicly about future prospects for FDA approval of their advanced drug candidates. The court’s opinion reemphasizes the dangers of volunteering incomplete information, holding that a company that touts the results of trials or tests as supportive of a pending application for FDA approval must also disclose negative test results or concerns expressed by the FDA about those studies—even if the company reasonably believes the concerns are unfounded and are the product of a good faith disagreement.

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(Proxy) Voting Made Easy?

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The SEC recently proposed amendments to the proxy voting rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. This proposed change would eliminate the two “competing slates” cards and allow shareholders to vote for their preferred combination of board candidates, as they could if they voted in person.

The new rules would apply to all non-exempt votes for contested elections other than those involving registered investment companies and business development companies, would require management and dissidents to provide each other with advance notice of the names of their nominees, and would set formatting requirements for the universal proxy cars. As with any newly proposed SEC rule, there will be a comment period of 60 days to solicit public opinion.

Interestingly, the Commission’s vote to adopt the newly proposed rules was a split decision, with Commissioner Piwowar issuing a strongly worded dissent. According to Commissioner Piwowar, the proposed universal proxy rules “would increase the likelihood of proxy fights at public companies,” and would allow special interest groups to “use their increased influence to advance their own special interests at the expense of shareholders.” He also noted that under the new rules, dissidents are only required to solicit holders of shares representing a majority of those entitled to vote, meaning that many retail investors will not receive either the dissident’s proxy statement or disclosures about the dissident’s nominees.

SEC’s 2016 Activity Breaks Enforcement and Whistleblower Records

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Earlier this month, the SEC (the “Agency”) announced that it initiated a record-breaking 868 enforcement actions in fiscal year 2016. This figure – along with other milestones – reflect the Agency’s commitment to expanding the scope and reach of its enforcement programs to pursue an array of federal securities law violations.

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It’s Hunting Season. For Unicorns? Lawsuit Against Theranos Signals Trend In Investors Going After Late-Stage Start-ups

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Last week brought more bad news for private blood testing company Theranos Inc., as San Francisco-based Partner Fund Management L.P. (“PFM”) launched a suit claiming that it was duped into making a $96.1 million investment in Theranos in February 2014.  The complaint, filed in Delaware Court of Chancery, alleges common law fraud, securities fraud under California’s Corporations Code, and violations of Delaware’s Consumer Fraud Act and Deceptive Trade Practices Act, among other things, against Theranos, its Chief Executive Officer, Elizabeth Holmes, and its former Chief Operating Officer, Ramesh Balwani.

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Supreme Court Weighs Insider Trading: Friends, Family, and Others

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On October 5, 2016, the Supreme Court heard oral arguments in US v. Salman, a closely-watched insider trading case in which the Ninth Circuit held that, where the insider had a close personal relationship with the tippee, a remote tippee could be liable for insider trading even in the absence of a pecuniary benefit to the tipper. In so holding, the Ninth Circuit declined to extend the Second Circuit’s 2014 decision in US v. Newman, which held that insider trading requires proof of “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Early analysis of the arguments in Salman suggests that the Court will, as some have previously predicted , “split the baby” by leaving Salman’s conviction in place while also adopting a rule that would not affect the result in US v. Newman.  Given the Court’s decision to grant certiorari in Salman rather than Newman, this result seems all the more likely.

Bassam Salman was convicted of insider trading after trading on information he received from Michael Kara, his brother in law, who in turn received that information from his brother, Maher Kara. Salman was aware that the information came from Maher, a Citigroup banker working on various health care deals and sharing information very openly with his brother.  Michael also traded on the information and, although he told Maher that he was not trading, Maher suspected otherwise.  Nevertheless, Maher never received any financial or other concrete benefit in the exchange, though there was evidence that he and his brother had a close relationship.

In Salman’s brief, he argued that his conviction was inconsistent with the Court’s seminal 1983 insider trading decision in SEC v. Dirks as interpreted by the Second Circuit in Newman: that insider trading requires proof of “at least a potential gain of a pecuniary or similarly valuable nature.”  That is, to the extent that Maher offered material, non-public information to his brother in violation of his confidentiality obligations to his employer, that activity did not violate insider trading laws because Maher did not receive anything concrete in exchange.

From the outset of oral argument, several justices were noticeably skeptical of Salman’s arguments. Justices Ruth Bader Ginsberg and Anthony Kennedy questioned whether Salman’s conviction was just analogous to standard accomplice liability.  Justice Kennedy observed that where the tippee does the trading and benefits thereby, as in Salman’s case, the tippee is really the recipient of the “gift” of the tip and by traditional analysis is an accomplice to the tipper’s wrongdoing.

In addition, several justices repeatedly went back to Dirks, in which the Court said that it might be possible to infer the required personal benefit “when an insider makes a gift of confidential information to a trading relative or friend.”  As Justice Kennedy observed, Dirks suggested that “there’s a benefit in making a gift,” even if there is no pecuniary exchange.  Justices Elena Kagan and Stephen Breyer both observed that Salman’s suggested approach would be a significant departure from most courts’ interpretations of the original Dirks holding.  Justice Kagan noted that Dirks seemed to indicate that “it’s not only about when there’s a quid pro quo from the tippee to the tipper, but when the tipper makes a gift to the tippee, and in particular a relative or friend.”  Justice Breyer noted outright that if the court embraced Salman’s approach, it was “really more likely to change the law that people have come to rely upon than it is to keep to it.”

The government, by contrast, had urged that there was no conflict among the reasoning upholding Salman’s conviction, SEC v. Dirks, or US v. Newman.  The government urged that Michael and Maher had the kind of “meaningfully close personal relationship” that was not present in Newman, a case that involved several levels of remote tippees, none of whom had particularly close friendships much less a family relationship as in Salman.  By this logic, the result in Salman was entirely consistent with both Dirks and Newman because the “personal relationship” was sufficiently different and satisfied the precedent established by Dirks.

When the government lawyer took the podium, the justices continued to pose challenging questions, but many justices signaled an apparent belief that the government’s position was more acceptable. Some justices did seem concerned that under the government’s proposed rule, non-relatives or non-friends might be swept into liability, but Deputy Solicitor General Michael Dreeben seemed ready to concede some ground on that front.  Toward the end of the argument, Justice Kagan asked whether the court could “separate out that strange, unusual, hardly-ever-prosecuted situation” of non-friends or non-relatives facing liability and Dreeben said he would be “fine with that.”  As described above, his response may open the door for the Court to uphold Salman’s conviction while leaving Newman unchanged.

Early and Often: DOJ Tells Companies to Cooperate Early or Pay the Price

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An important issue for companies and their executives that are the subject of an investigation by the federal government is whether, and how early, to cooperate.

On September 27, 2016, Principal Deputy Associate Attorney General Bill Baer delivered remarks at the Society of Corporate Compliance and Ethics Conference, where he laid out in some detail his views on the value of early cooperation with the federal government in financial cases, and the consequences for waiting. As the number 3 attorney in the Department of Justice who is charged with overseeing civil litigation, antitrust, and other large divisions, Baer’s words are significant, and are a further gloss on the so-called “Yates Memo”, which Deputy Attorney General Sally Yates released last September, detailing DOJ’s guidance on individual accountability for corporate wrongdoing.

Speaking specifically about cases against banks and the fallout from protracted litigation involving residential mortgage-backed securities, Baer said those cases could have been resolved more quickly if only the financial institutions “had decided early to cooperate.” Consequently, “each [institution] paid a lot more than it would have if it had cooperated early on.” Recalling that many of these same institutions had nonetheless sought “significant cooperation credit,” Baer stated that DOJ “dismissed the arguments quickly because they so lacked merit.”

So how early is early enough, and how can your company get credit for cooperating? Baer elaborated on recent “internal” guidance he has provided to his attorneys in civil enforcement matters.

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No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits

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On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.

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Too Good to Be True: Fraudulent Self-Promotion Lands “Prodigy” in Hot Water with SEC

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In June 2014, the Office of Investor Education and Advocacy at the Securities and Exchange Commission issued an alert cautioning that investment newsletters are often “used to carry out schemes designed to deceive investors.” In particular, the SEC advised investors to be “highly suspicious” of newsletter “promises” of “high investment returns” and to contact the SEC to report potential securities fraud in newsletters and other promotional materials.

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The SEC Wins First Jury Trial in a Muni Case: SEC v. City of Miami and Michael Boudreaux

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In what the SEC called “the first federal jury trial by the SEC against a municipality or one of its officers for violations of the federal securities laws,” a jury in the U.S. District Court for the Southern District of Florida found the City of Miami and its former budget director, Michael Boudreaux, guilty of securities fraud for misrepresentations related to three municipal bond offerings in 2009. Both Defendants are expected to appeal the jury decision.

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