On May 31, 2016, the Delaware Chancery Court rejected shareholders’ allegations of corporate wrongdoing in a derivative suit against a national healthcare company, Bioscrip, holding that Plaintiff failed to adequately allege demand futility with respect to Bioscrip’s board of directors. For the first time, the Delaware Court found that Plaintiff was required to demonstrate demand futility with respect to the board of directors that was in place after shareholders filed their derivative complaint. Park Emps.’ & Ret. Bd. Emps.’ Annuity & Ben. Fund v. Smith, No. 11000-VCG (Ch. May 31, 2016).
Jennifer Nejad Poer
Jennifer Nejad Poer is a senior associate in the San Francisco office and a member of the Securities Litigation, Investigations and Enforcement Group. Jennifer's practice focuses on representing individuals and corporations in connection with SEC enforcement actions and investigations, and DOJ investigations.
She has represented various companies, directors and officers, and employees in these arenas, including matters involving allegations of healthcare fraud, accounting fraud, money laundering, and insider trading.
Jennifer has conducted numerous corporate internal investigations involving compliance, embezzlement, fraud and securities laws issues. Her experience includes large scale investigations for multinational corporations as well as targeted investigations for small organizations.
Jennifer has also represented corporations and individuals in connection with civil securities class actions and shareholder derivative suits. In addition, Jennifer counsels public and private companies, as well as directors and officers regarding corporate indemnification agreements and obligations.
Jennifer completed a secondment with the San Francisco District Attorney's office in 2016, where she led multiple jury trials.
Notable representations include:
- Represented major financial institution in connection with SEC investigation of alleged violations of securities and money laundering regulations.
- Represented medical device company in connection with DOJ investigation involving allegations of healthcare fraud.
- Represented former general counsel of a public software company in connection with SEC enforcement action alleging violations of various accounting and securities laws.
- Represented former Senior Vice President of publicly traded software company in connection with SEC investigation of alleged violations of securities laws.
- Represented aircraft leasing company in connection with internal investigation related to potential insider trading.
- Represented audit committee of digital money transfer company in connection with internal investigation related to suspected employee fraud.
- Represented former executive of Fortune 500 company in connection with Delaware shareholder derivative litigation.
- Represented publicly traded technology company in connection with class action litigation involving product defect allegations.
- Represented numerous witnesses in connection with high-profile stock option backdating trial.
- Represented Limited Liability Company (LLC) and LLC Manager in connection with shareholder dispute.
Posts by: Jennifer Nejad Poer
On April 13, 2016, the SEC published a concept release discussing and seeking public comment on modernizing certain business and financial disclosures required by Regulation S-K, which lays out reporting requirements for various public company SEC filings. The release focuses on whether the disclosure requirements – many of which have seen little change in decades – continue to elicit the information that investors need for investment and voting decisions, and whether any of the relevant rules have become outdated or unnecessary. It also seeks input on how registrants can most effectively present material information, including how the Commission can assist with improving the readability and navigability of SEC filings. As SEC Chair Mary Jo White explained in an April 13, 2016 statement regarding the release, “[w]e want to make sure that [the Commission’s disclosure] rules are facilitating both timely, material disclosure by companies and shareholders’ access to that information. And we want to make sure that our requirements are as efficient as they can be.”
Last Monday, the United States Supreme Court denied cert in the highly publicized insider trading case of United States. v. Newman, 773 F.3d 438 (2d Cir. 2014). Without providing further commentary, the justices said they would not consider the Government’s challenge to the Second Circuit’s decision overturning the insider trading convictions of two hedge fund portfolio managers. The Supreme Court’s denial means that the Second Circuit’s decision limiting the scope of insider trading liability remains good law. It also signals the end of the Justice Department’s efforts to overturn a decision that the Government called a “roadmap for unscrupulous traders.”
On July 17, 2015, the SEC announced a whistleblower award of over $3 million to a company insider who provided information that “helped the SEC crack a complex fraud.” This payout represents the third highest award under the SEC’s whistleblower program to date. The SEC has made two of the three highest payments to clients of the same law firm – Phillips & Cohen LLP. (The SEC paid roughly $14 million to a whistleblower in October 2013, and nearly $30 million to a foreign whistleblower represented by Phillips & Cohen in September 2014.). This latest multi-million dollar payout suggests that the SEC’s whistleblower program is in full swing, and that legal representation of whistleblowers may be on the rise.
Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud. While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.
As we have previously reported, practitioners and judges alike have recently been questioning the SEC’s increased use of administrative proceedings. Defense lawyers complain that administrative proceedings, which have historically been a rarely used enforcement tool, are stacked against respondents. Recently, Judge Rakoff of the U.S. District Court for the Southern District of New York publicly discussed the “dangers” that “lurk in the SEC’s apparent new policy.” Director of Enforcement Andrew Ceresney delivered a speech late last month responding to public criticism, in particular countering many points raised by Judge Rakoff.
Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.
Will shareholder litigation survive the abandonment of the fraud-on-the-market presumption of reliance? After the Supreme Court’s announcement that it will be considering the presumption in Halliburton Co. v. Erica P. John Fund, No. 13-317, there is much discussion of whether a rejection of fraud-on-the-market could mean the end of securities litigation. The fraud-on-the-market doctrine, set forth in Basic Inc. v. Levinson, 485 U.S. 224, 243-50 (1988), allows a plaintiff seeking class certification to use a rebuttable presumption to establish reliance. The presumption is that public information is reflected in the price of a stock traded on a well-developed market, and that investors rely on the integrity of the market price when deciding whether to buy or sell a security. Under the doctrine, investors do not need to show they actually relied on a misstatement in order to satisfy the “reliance” element of their claim for class certification. Though overturning the presumption would have a significant impact on shareholder class actions under Section 10(b) of the Securities Exchange Act of 1934, it would not spell the end of shareholder litigation. READ MORE
The second quarter of 2013 saw the largest quarterly percentage decline in new securities actions since before the 2007/2008 financial crisis. New filings in the first quarter plummeted by 41 percent, from 352 in the first quarter to 234 in the second quarter. This drop represents a 55 percent decrease in the number of new securities actions filed as compared to same period last year (Q2 2012). It has been approximately five years since we have seen a lower number of quarterly filings.
The number of new securities fraud cases also plummeted, falling 59 percent from the prior quarter, with the number of new filings decreasing from 149 to 61. There were also quarterly declines in newly-filed shareholder derivative actions, which decreased from 43 filings in the first quarter to 37 in the second quarter, and breach of fiduciary duty cases, which fell from 99 new filings in the first quarter to 71 in the second quarter.
Not only did the number of securities actions filed drop significantly, but so too did the average settlement amounts. The average settlement for all types of securities cases in the second quarter was just over $37 million, a marked decrease from the average settlement amount of $69.3 million during the first quarter of 2013.
What’s going on? There are a number of factors that may be contributing to these downward filing trends. The stock market has been strong, so many investors have little to complain about. Moreover, the surge in suits against U.S.-listed Chinese companies appears to have run its course, and no new scandal or market development has yet become the next “big thing” that will drive increased filings. In addition, SEC enforcement activities have continued to shift into areas (such as insider trading and whistleblowing) that do not always spawn parallel private litigation. It remains to be seen whether the recent appointment of new SEC personnel or a renewed focus on accounting fraud cases by regulators, which is anticipated by some analysts, will cause a variation in these trends moving forward.
Source = Advisen D&O Claims Trends: 2013 Report (July 2013)
Last Friday, Judge Kleinberg of the California Superior Court, County of Santa Clara, dismissed two shareholder class actions against the former directors of Actel Corporation and Applied Signal Technology, Inc. for breach of fiduciary duties arising out of the sales of Actel and Applied Signal to third-party buyers. In doing so, Judge Kleinberg stated that, under California law, damages claims brought by shareholders of California corporations against directors for breach of fiduciary duties in connection with the approval of a merger are derivative, not direct. Thus, because a plaintiff in a shareholder’s derivative suit must maintain continuous stock ownership throughout the pendency of the litigation, and the plaintiffs ceased to be stockholders of Actel and Applied Signal by reason of a merger, Judge Kleinberg held that they lacked standing to continue the litigation.
In holding that post-merger claims against directors of California acquired corporations are derivative, Judge Kleinberg relied on the pre-Tooley rationale (which is no longer controlling in Delaware and has been questioned in California) that a harm suffered equally by all shareholders in proportion to their pro rata ownership of the company is a derivative harm. Judge Kleinberg rejected the plaintiffs’ argument that Delaware’s Tooley standard for determining whether a claim was direct or derivative was adopted by the California Court of Appeal in Bader v. Andersen, 179 Cal. App. 4th 775 (2009). According to Judge Kleinberg, in stating that California and Delaware law were “not inconsistent,” the Bader court was merely observing that the results of applying California versus Delaware law in that case were not inconsistent; it was not saying that California and Delaware law are the same on the direct versus derivative issue.
Judge Kleinberg’s holding is a victory for the defense bar, as it means that merger litigation involving California incorporated targets will be susceptible to dismissal by demurrer or summary judgment following the preliminary injunction stage.