On December 16, 2014, the Ninth Circuit affirmed the U.S. District Court of Arizona’s dismissal of a Section 10(b) class action against Apollo Education Group, Inc., a for-profit education company, and several of its officers and directors. In doing so, the Ninth Circuit held that the heightened pleading standard of Federal Rule of Civil Procedure Rule 9(b) applies to all elements of a securities fraud action, including loss causation.
M. Todd Scott
M. Todd Scott, a senior associate in the San Francisco office, is a member of the Securities Litigation, Investigations and Enforcement Group. His practice focuses on shareholder derivative suits, securities class actions, other complex business litigation and corporate governance counseling.
Mr. Scott has represented numerous corporations, directors and officers in federal securities class actions, SEC enforcement actions and shareholder derivative suits, at arbitration and on appeal. Notable engagements include:
- Weinstein v. Chesapeake Energy Corp. et al., 2013 U.S. Dist. LEXIS 51380, 2013 WL 1457718 (W.D. Okla. 2013). Obtained dismissal at the pleading stage of a putative securities class action asserting claims under the Securities Exchange Act of 1934 against the company and its top officers.
- United Food and Commercial Workers Union v. Chesapeake Energy Corp., 2013 U.S. Dist. LEXIS 45434, 2013 WL 1336123 (W.D. Okla. 2013). Obtained summary judgment and dismissal of a securities class action asserting claims under the Securities Act of 1933 against the company, its top officers, and board of directors.
- Cheseldine v. McClendon. Obtained dismissal at the pleading stage of a putative stockholder derivative action asserting claims for breach of fiduciary duties against Chesapeake Energy Corp.’s board of directors. Also successfully repelled motion for temporary restraining order to enjoin payment of outgoing CEO’s severance.
- Egleston v. McClendon. Obtained dismissal at the pleading stage of a putative stockholder derivative action asserting claims for breach of fiduciary duties against Chesapeake Energy Corp.’s board of directors.
- Norris v. McClendon et al. Derivative Litigation. Represented the board of directors in a shareholder derivative action challenging company proxy disclosures. Obtained a dismissal the pleading stage.
- Bundy v. IronPlanet. Represented the company in an action alleging breach of a repurchase contract over a founder’s shares of stock. After arbitration obtained a complete judgment in the client’s favor and an award of attorneys’ fees and costs.
- Cheseldine v. Chesapeake Energy Corp. Defended the Company against an invasive shareholder books and records action and obtained a dismissal at the pleading stage.
- In re: Micrus Endovascular Securities Litigation. Obtained dismissal at the pleading stage of a securities class action asserting claims under the Securities Exchange Act of 1934 Act against the company and certain of its officers and directors.
- KPMG Corporate Finance v. LeadClick Media, Inc.. Represented the firm in an action to recover fees. After arbitration obtained a complete judgment in the client’s favor and an award of attorneys’ fees and costs.
Mr. Scott also regularly advises companies on questions of corporate governance, fiduciary duties and disclosure obligations, and has extensive experience in responding to shareholder litigation demands and books and records requests.
Before joining the firm, Mr. Scott was an associate at the San Francisco office of Clifford Chance US LLP. In his spare time, Mr. Scott is a musician, author and father to three amazing children.
One of the most significant challenges facing plaintiffs in pleading a violation of Section 10(b) of the Securities Exchange Act of 1934 is sufficiently alleging that the defendant company possessed scienter, or an “intent to deceive.” Because a corporation can only act through its employees, the challenge is to determine which employees’ alleged state of mind should be imputed to the company.
On October 10, 2014, the Sixth Circuit considered that question in In re Omnicare Sec. Litig., No. 13-5597, 2014 WL 5066826 (6th Cir. Oct. 10, 2014). Omnicare involved a Section 10(b) shareholder class action against Omnicare, Inc., a pharmaceutical manufacturer, alleging that Omnicare’s financial statements and other public disclosures contained misstatements regarding the company’s compliance with Medicare and Medicaid regulations. In particular, plaintiffs alleged that although Omnicare’s internal audit group discovered that certain company facilities had submitted false reimbursement claims, Omnicare failed to disclose the fraud and, in publicly-filed documents signed by the CEO and CFO, asserted that Omnicare’s “billing practices materially comply with applicable state and federal requirements.” Read More
In recent years, the DOJ and SEC have significantly increased their Foreign Corrupt Practices Act (FCPA) enforcement efforts, and in the process, have successfully advocated the theory that state-owned or state-controlled entities should qualify as instrumentalities of a foreign government under the FCPA. The FCPA defines a foreign official as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” In August 2014, the government’s broad definition of who constitutes a “foreign official” came into question for the first time when two individuals (Joel Esquenazi and Carlos Rodriguez) filed a petition for writ of certiorari with the Supreme Court to challenge their convictions under the FCPA and argued for the high court to limit the FCPA’s definition of the term. However, on October 6, 2014, the Supreme Court declined to consider the potential landmark case effectively upholding the government’s broad view of the term “foreign official.” Read More
Back in May we discussed ATP Tour, Inc. v. Deutscher Tennis Bund a seminal Delaware Supreme Court case that upheld a non-stock corporation’s “loser pays” fee-shifting bylaw. ATP Tour held that where a Delaware corporation adopts a fee-shifting bylaw, it can recover its fees and costs from any shareholder that brings a derivative lawsuit and loses. Many commentators have suggested the case would effectively kill derivative actions in Delaware and indeed, since the time of that decision, the Delaware Corporation Law Council has proposed amendments to the Delaware General Corporation Law that would limit its applicability to only non-stock corporations.
Last week the Oklahoma State Legislature went a step further than ATP Tour and amended the Oklahoma General Corporation Act to specifically require fee-shifting for all derivative lawsuits brought in the state, whether against an Oklahoma corporation or not. Unlike the fee provision in ATP Tour, however, the law also affords derivative plaintiffs the right to recover their fees and costs should they win final judgment.
The difference is likely substantial. For while the law will potentially chill unmeritorious derivative actions, also known as “strike suits,” it could also provide an incentive for derivative plaintiffs with strong claims. Where shareholders use the “tools at hand”—including books and records inspection requests—to carefully vet their claims before filing, the promise of a fee recovery could encourage shareholder plaintiffs to bring claims they otherwise might not.
Consider: in the typical derivative lawsuit, the shareholder plaintiff stands to gain nothing tangible if he or she wins. Because he or she is suing on behalf of the corporation, any recovery will inure to the corporation itself. Thus, under the old regime, even if a derivative lawsuit was successful, the plaintiff would receive, at most, any resulting increase in the value of his or her company stock. Under the new statute, that same plaintiff could stand to receive the not-insubstantial costs of his or her efforts.
Earlier this month, Judge Victor Marrero of the Southern District of New York issued his opinion certifying a class of buyers of the common stock of a company created by a Chinese reverse merger. McIntire v. China MediaExpress Holdings, Inc., 2014 U.S. Dist. LEXIS 113446 (S.D.N.Y. Aug. 15, 2014). In doing so, he rejected defendants’ Daubert motion challenging the qualifications and methodology of plaintiffs’ expert witness on market efficiency, Cynthia Jones, and concluded that the market was efficient enough to support the Basic presumption of reliance and to permit class certification. Read More
Corporations facing federal securities suits can sometimes avoid liability by claiming that their forward-looking statements were so vague or indefinite that they could not have affected the company’s stock price and are therefore not material. Such statements are not actionable because courts consider them “puffing,” famously described by Judge Learned Hand nearly 100 years ago as “talk which no sensible man takes seriously.” Though we cannot know today what Judge Hand would think of the civil complaint recently filed by the SEC against several marijuana-company stock promoters, it’s safe to say that this isn’t the kind of ‘puffing’ he had in mind.
The defendants in the SEC civil action are all stock promoters, most of whom operate websites where they promote stocks, including microcap or so-called “penny” stocks. The SEC alleges that the defendants promoted shares in microcap companies related to the marijuana industry. For example, one of the companies, Hemp Inc., claims to be involved with medical marijuana. According to the SEC, three of the defendants bought and sold more than 40 million shares in Hemp Inc. in order to give the appearance that there was an active market in the company’s stock. In reality, the transactions allegedly consisted of wash trades and matched orders. A wash trade occurs when a security is traded between accounts, but with no actual change in beneficial ownership, while a matched order entails coordinating buy and sell orders to create the appearance of trading activity. As the defendants were allegedly generating trading activity, they were also allegedly promoting the stock on the Internet, touting “a REAL Possible Gain of OVER 2900%” in Hemp Inc. stock. Wow, that is high.
In a virtual course on how to bring—or not bring—an M&A strike suit, on June 30, a Delaware Chancery Court dismissed all shareholder claims against a merger target and its acquirer, ending nearly two years of litigation. Though the allegations are familiar in the strike-suit context, the 45-page opinion which this ~$100 million merger yielded is notable for its methodical tour of Delaware fiduciary-duty law, 102(b)(7) exculpatory provisions, and so-called Revlon duties. The roadmap opinion should be required reading for directors considering a merger.
Defendants Ramtron International and Cypress Semiconductor both work in the technology industry and the two began their courtship in 2011. Though shareholder-plaintiff Paul Dent couldn’t prevent the 2012 Ramtron-Cypress marriage, he continued to hold out for a better dowry, naming Ramtron’s board and Cypress in a suit alleging that Cypress aided and abetted Ramtron’s board in breaching its duty to shareholders, and seeking quasi-appraisal of his shares. Vice Chancellor Parsons disposed of these claims, taking the time to explain in unusual detail why the allegations utterly failed. Read More
Can a securities plaintiff satisfy Section 11 of the Securities Act simply by alleging that a statement of opinion was objectively false, or must the plaintiff also allege that the speaker subjectively knew the statement was false when it was made? That is the question taken up by the Supreme Court earlier this month when it granted certiorari in Omnicare, Inc. v. The Laborers District Council Construction Industry Pension Fund and the Cement Masons Local 526 Combined Funds. As we previously discussed, the Sixth Circuit decision on appeal runs contrary to decisions in the Second and Ninth Circuits, so all eyes are on the Court to settle the debate. Read More
On January 31, 2014, Chevron Corporation moved to certify to the Delaware Supreme Court the question of whether exclusive forum bylaws are valid under Delaware law. Chevron filed its motion before the Honorable Jon S. Tigar of the Northern District of California. If Judge Tigar certifies the question, it seems likely that the Delaware Supreme Court will affirm a recent Delaware Court of Chancery decision finding such bylaws to be valid under statutory and contractual law, given that the author of that decision, then-Chancellor Leo E. Strine, is now Chief Justice of the Delaware Supreme Court.
In 2013, plaintiffs filed suit in both the Delaware Court of Chancery and the Northern District of California challenging Chevron’s board-adopted forum exclusivity bylaw. The case in the Northern District was stayed pending the outcome of the Delaware case, since both involved questions of Delaware state law. The Delaware plaintiffs argued that the forum exclusivity bylaw was statutorily invalid under Delaware General Corporation Law (DGCL), and contractually invalid because it was adopted unilaterally without shareholder consent. In June 2013, the Delaware Court of Chancery – in a decision by then-Chancellor Strine – found that the bylaw was enforceable, and that the Delaware Court of Chancery should be the sole and exclusive forum for (1)any derivative action brought on behalf of the Corporation, (2) any action asserting a claim of breach of a fiduciary duty, (3) any action asserting a claim arising pursuant to any provision of the DGCL, or (4) any action asserting a claim governed by the internal affairs doctrine. Read More
On January 7, 2014 the SEC lost an insider trading bench trial before Judge William Duffey of the U.S. District Court for the Northern District of Georgia. In a thorough opinion, Judge Duffey found the SEC’s case to be entirely circumstantial, founded on no more than a pattern of trades that were made in close proximity to communications between the purported tipper and tippee. This case shows how difficult insider trading claims are to prove, especially without wire taps, and may give the Commission pause in bringing cases to trial that rest on such circumstantial evidence.
On trial was Larry Schvacho, a retiree who spent much of his free time investing. The SEC alleged Schvacho had misappropriated material, nonpublic information from Larry Enterline, a long time friend, who was then CEO and director of Comsys IT. Although Schvacho had traded in Comsys stock for many years, the SEC’s case focused on trades Schvacho made during the run-up to an acquisition of Comsys by Manpower in early 2010. As the SEC established at trial, Schvacho and Enterline had repeatedly communicated and socialized together during the period, and there were numerous phone calls, text messages, car rides, sailing trips, and dinners where Enterline could have given Schvacho information about the acquisition. When news of the acquisition was eventually made public to the market, Schvacho made over $500,000 on his trades. Read More