Disclosure-only settlements have been popular in the past – last year, about 80% of settlements in M&A-related lawsuits were for disclosures only, according to Cornerstone Research – but lately they have come under scrutiny. The Delaware Court of Chancery has issued opinions refusing disclosure-only settlement agreements before, noting that at times in these cases “there is simply little to commend the process of weighing the merits of a ‘settlement’ of litigation where the only continuing interest is that of the plaintiffs’ counsel in recovering a fee.” The incentives of attorneys on both sides can be such that “the potential claims belonging to the class [are not] adequately or diligently investigated or pursued.”
Todd has represented numerous corporations, directors and officers in federal securities class actions, SEC enforcement actions and shareholder derivative suits, at arbitration and on appeal.
Todd 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, Todd was an associate at the San Francisco office of Clifford Chance US LLP. In his spare time, Todd is a musician, author and father to three amazing children.
Posts by: M. Todd Scott
On August 11, 2015, the SEC announced that it was bringing fraud charges against 32 defendants for their alleged participation in a five-year, international hacking and insider trading scheme. According to the SEC, two Ukrainian men hacked into at least two major newswire services, stole non-public copies of embargoed corporate announcements containing quarterly and annual earnings data, and provided the announcements to 30 other defendants, who traded off the information. In parallel actions, the U.S. Attorney’s Offices for the District of New Jersey and the Eastern District of New York also announced criminal charges against some defendants named in the SEC’s action. The SEC’s enforcement action may be a harbinger of events to come. As we have written, cybersecurity is emerging as the SEC’s newest area of focus for enforcement actions.
On May 28, 2015, three Fannie Mae and Freddie Mac (the “Companies”) shareholders filed a complaint in the United States District Court for the Northern District of Iowa against the Federal Housing Finance Agency (“FHFA”), its director, and the U.S. Treasury Department in connection with FHFA’s agreement to pay all of the Companies’ profits to the Treasury on a quarterly basis (the “Net Worth Sweep”). According to plaintiffs, the Net Worth Sweep would be all encompassing depriving the private shareholders of their profits forever.
As we have previously discussed in prior posts, shareholder demands to inspect confidential corporate information are being made with increased frequency, and are forcing more and more companies to grapple with their legal obligations to respond. Earlier this month in Fuchs Family Trust v. Parker Drilling, the Delaware Court of Chancery issued further guidance, and explained why in certain cases, companies need not provide any information at all.
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.
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.