Supreme Court Affirms Class Certification and Judgment Predicated upon “Representative Evidence”

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On March 22, 2016, the Supreme Court issued a decision permitting class plaintiffs to rely on “representative” or “sample” evidence to satisfy the prerequisites to class certification and certain elements of their claims.  See Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, 2016 WL 1092414 (Mar. 22, 2016).  This is one of the relatively few recent class action decisions by the Court that could be construed as something other than a victory for class defendants.  As Justice Thomas stated in dissent, the decision arguably is inconsistent with the Court’s pro-defendant decisions in Wal-Mart and Comcast.  We have previously discussed the Supreme Court’s recent class action jurisprudence, including the Wal-Mart and Comcast decisions.

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Former Hedge Fund Manager’s Civil Rights Suit Against New York U.S. Attorney Permitted to Proceed into Discovery

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Shortly into his tenure as United States Attorney for the Southern District of New York, Preet Bharara announced a crackdown on insider trading, indicating that it would be his office’s “top criminal priority” and that investigations would utilize novel and “covert methods” to achieve convictions, including using wiretaps and informants.  According to Bharara, “every legitimate tool should be at our disposal.”  Over the next several years, federal prosecutors in Manhattan initiated nearly 100 insider trading cases against some of Wall Street’s leading names, and secured more than 80 convictions, many through guilty pleas.  For his work, Time magazine featured Bharara on its February 13, 2012 cover under the headline: “This Man is Busting Wall Street.”

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Second Circuit Applies Omnicare to Affirm Dismissal of Securities Fraud Actions

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On March 4, 2016, the Second Circuit affirmed the dismissal of two related securities actions against Sanofi Pharmaceuticals, its predecessor Genzyme Corporation, and three company executives (collectively, “Sanofi”).  In doing so, the Second Circuit offered its first substantial interpretation of the Supreme Court’s March 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), which addresses how plaintiffs can allege securities claims based on statements of opinion.

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Storm Warning for Safe Harbor

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On February 29, 2016, the Supreme Court denied certification in Harman International Industries Inc. et al. v. Arkansas Public Employees Retirement System et al., thereby leaving unanswered a number of questions related to the Safe Harbor provision of the Private Securities Litigation Reform Act (PSLRA).  The petitioners, defendant Harman International Industries Inc. (“Harman” or “the Company”) and related individual defendants, argued that the D.C. Circuit Court of Appeals erred when it reversed the district court’s decision granting Harman’s motion to dismiss.  In declining to hear the case, the Supreme Court failed to resolve a circuit split concerning the relevance of state of mind to the efficacy of cautionary language.

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Chancery Court Reaffirms There Is No Magic Number for “Control” Status

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On February 29, 2016, the Delaware Court of Chancery denied a motion to dismiss fiduciary duty claims against certain current and former directors of Halt Medical and a 26% stockholder, American Capital, arising out of a transaction that was allegedly designed to “squeeze out” minority stockholders.  See Calesa Associates, L.P. v. American Capital, Ltd., C.A. No. 10557-VCG.  Vice Chancellor Glasscock found that the plaintiffs had adequately alleged that American, despite owning only 26% of the company’s shares, exercised sufficient influence over the Halt Medical board such that it and certain affiliates could be deemed “controlling stockholders” owing fiduciary duties to other stockholders.  Among other things, the decision in Calesa reaffirmed that majority stock ownership is not the sole criterion for determining “control.”  The decision also sounded a cautionary note, however, by suggesting that, where plaintiffs remain minority stockholders in the company after the allegedly dilutive transaction at issue, they must plead demand futility even where, as here, only direct claims are asserted, or face dismissal at the pleading stage.

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The Ripple Effects of U.S. v. Newman Continue: SEC Lifts Administrative Bar on Downstream Insider Trading Tippee and Tipper Requests that Third Circuit Vacate SEC Settlement

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The ripple effects of the Second Circuit’s landmark insider trading decision, United States v. Newman, 773 F.3d 438 (2d Cir. 2014), were felt again last week.  On Tuesday, February 23, 2016, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) ruled that Former Neuberger Berman Analyst Sandeep “Sandy” Goyal, whom the SEC previously barred from the securities industry after he pled guilty to insider trading, could participate in the industry again. The SEC’s rare decision to lift an administrative bar order resulted from Newman, (previously discussed at length here), which led to Goyal’s criminal conviction being vacated and the civil claims against him being dropped by the SEC.  Newman raised the bar for what prosecutors in tipper/tippee insider trading cases have to show by holding that tipper/tippee liability requires the tipper to receive a “personal benefit” amounting to a quid pro quo or pecuniary benefit in exchange for the tip and the tippee to know of that benefit.  Despite the SEC’s decision to drop the administrative bar against Goyal in light of Newman, as recently as SEC Speaks on February 19-20, 2016, SEC Deputy of Enforcement Stephanie Avakian affirmed that insider trading cases “continue[] to be a priority” for the Commission.   Nonetheless, the ripple effects of Newman continue to call the government’s ability to successfully bring both criminal and civil cases into question.

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Full Court Pressure: SEC OIG Finds No Undue Influence By ALJs in Favor of Government

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The Securities and Exchange Commission’s Office of the Inspector General (“OIG”) recently released findings from its extensive investigation into allegations of potential bias against respondents in SEC administrative proceedings.  The OIG report comes at a time when the fairness of the SEC’s in-house administrative forum is under scrutiny from both inside and outside of the agency.

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SEC Speaks – What to Expect in 2016

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The leaders of the Securities and Exchange Commission (“SEC” or “Commission”) addressed the public on February 19-20 at the annual SEC Speaks conference in Washington, D.C.  The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its increasing focus on cyber issues including its use of new technology to surveil and root out harmful practices in the modern and increasingly-complex market, and its continued focus on the conduct of gatekeepers.  From a litigation and enforcement perspective, key takeaways from the conference include the following:

SEC Chair Mary Jo White began her remarks by touting the “unprecedented number of enforcement cases” brought by the Commission in 2015, which produced “an all-time high for orders directing the payment of penalties and disgorgement”—a trend that she stressed would continue in 2016.  READ MORE →

Mark Cuban Challenges the Referee: the Constitutionality of SEC In-House Courts

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After the repeated challenges to the SEC’s in-house courts as previously reported, Mark Cuban joined the debate by filing an amicus curiae brief in support of petitioners Raymond J. Lucia Companies, Inc. and Raymond J. Lucia (collectively “Lucia”) in Lucia v. SEC.  Cuban, describing himself as a “first-hand witness to and victim of SEC overreach” in a 2013 insider trading case brought against him in an SEC court, argued that the D.C. Circuit should grant the petitioners’ appeal because SEC in-house judges are unconstitutionally appointed.

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Chancery Court Continues to Close the Door on Disclosure-Only Settlements and Fees (But Opens a Window for “Mootness Dismissals”)

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As previously discussed here, in 2015, the Delaware Court of Chancery issued a number of decisions calling for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to a shareholder class.  For example, the recent decision in In re Riverbed Technology, Inc. Stockholders Litigation expressly eliminated the “reasonable expectation” that a merger case can be settled by exchanging insignificant supplemental disclosures (and nothing more) for a broad release of claims.  In In re Trulia, Inc. Stockholder Litigation, the Chancery Court demonstrated that its “increase[ed] vigilance” in this area is genuine, rejecting a disclosure-only M&A settlement and finding that the supplemental disclosures did not warrant the broad release of claims.

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