Section 10(b)

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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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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It’s Not Easy Being Green: LeapFrog Execs Dodge Class-Action Over Sales Projections

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On August 2, 2016, U.S. District Judge Edward Chen dismissed a shareholder lawsuit brought against children’s educational toymaker LeapFrog Enterprises, Inc. (“LeapFrog”) for failure to adequately plead statements were false or misleading, or made with requisite intent.  Plaintiffs’ suit, which was consolidated in 2015, alleged that LeapFrog and its executives hid demand and inventory problems from investors.  The judge disagreed, finding that the investors had been sufficiently warned of problems with LeapFrog’s product lines and that the allegedly misleading statements were forward-looking and cautionary, and therefore fell within the PSLRA’s safe harbor.  Defendants’ public statements about many of the allegedly misleading topics helped drive home that Plaintiffs’ theory amounted to classic “fraud by hindsight.”

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SEC Chair Warns Silicon Valley That Unicorns Need To Be Watched and Monitored

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Speaking last week at the SEC’s and Rock Center’s Silicon Valley Initiative at Stanford Law School, SEC Chair Mary Jo White cautioned Silicon Valley’s start-up companies regarding their potential lack of internal controls.  In particular, she warned that unicorns—nonpublic start-up companies valued north of one billion dollars—may warrant special scrutiny into whether their corporate governance and investor disclosures are keeping pace with their growing valuations.  Ms. White repeatedly warned that the prestige of obtaining “unicorn” status may drive companies to inflate their valuations.

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SEC Announces Settlement with State Street – and a Suit Against a Big Law Partner – for Pay-to-Play Scheme

Gavel and Hundred-Dollar Bill

On January 14, 2016, the SEC entered into two no-admit, no deny settlements regarding an alleged pay-to-play scheme to obtain contracts from the Treasury Office for the State of Ohio.  The first was with State Street Bank and Trust Company (“State Street” or “the Bank”) – a custodian bank that provides asset servicing to institutional clients, and  the second with Vincent DeBaggis, a former State Street executive.  On the same day, the SEC filed suit against attorney Robert Crowe for his role in the scheme which allegedly involved causing concealed campaign contributions to be made to the Ohio Treasury Office to influence the awarding of contracts to State Street.  Mr. Crowe is a partner at the law firm of Nelson Mullins Riley & Scarborough and a former lobbyist for the Bank.

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Defrauded Defendant Defenseless Against Investors: Ninth Circuit Imputes Scienter of Embezzling CEO to Corporation for 10b-5 Claims

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Malfeasance by a corporate insider against his company has the potential to leave a gaping wound.  Facing a securities lawsuit due to that malfeasance is like salt in that wound.  Corporations targeted with such lawsuits have turned to the adverse interest exception to try to protect themselves from further liability stemming from the rogue executive’s wrongdoing.  But on October 23, the U.S. Court of Appeals for the Ninth Circuit issued a precedent-setting decision rendering that salve unavailable.  In In re ChinaCast Education Corp. Securities Litigation, the court held that under the federal securities laws, an executive’s scienter is imputed to the corporation where he “acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.”  Slip op. at 4.

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Carrying the Halli-burden: District Court Takes Up Price Impact at Class Certification in the Wake of Halliburton v. Erica P. John Fund

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In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance.  This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation.  The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.

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Reversals of Fortune: Putting the Brakes on Section 10(b) and Section 11 Claims Against Auditors of China-Based Companies

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A federal court’s recent dismissal of Securities Exchange Act claims against the auditor of a Chinese company prompted us to examine the state of recent U.S. civil securities litigation against accounting firms that audited China-based companies that were listed on US exchanges.

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Ninth Circuit Applies Heightened Pleading Standards for Loss Causation

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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.

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