Corporate Defense and Disputes

Important developments in U.S. securities law, white collar criminal defense, regulatory enforcement and other emerging issues impacting financial services institutions, publicly traded companies and private investment funds

First Circuit Adopts Prevailing Standard for Applicability of Federal Securities Laws to Foreign Investors, But Rejects Second Circuit’s Narrower Test

The U.S. Court of Appeals for the First Circuit held yesterday that the U.S. securities laws apply to foreign brokers’ solicitations of securities purchases by foreign investors if the purchasers or sellers incurred irrevocable liability within the United States to pay for or deliver the securities. The decision in SEC v. Morrone follows the “irrevocable liability” test that the Second, Third, and Ninth Circuits previously adopted to determine whether the federal securities laws apply to transactions in securities not listed on a U.S. exchange. However, the First Circuit disagreed with other Second Circuit precedent holding that, even if a domestic transaction has occurred under the “irrevocable liability” standard, the transaction still might be too foreign for U.S. law to apply. Continue Reading

DOJ Tax Division Shows Continued Interest in Cryptocurrency

On May 5, 2021, another federal district court, this time for the Northern District of California, permitted the IRS to proceed with a John Doe summons very similar to the one served on Circle last month (the subject of a recent post).  This time, the Summons seeks information on customers of a San Francisco-headquartered digital currency exchange company called Payward Ventures Inc. and Subsidiaries, d/b/a Kraken.  Just like in the Circle case, the Summons only applies to customers who have engaged in a total of $20,000 or more in transactions with the company between 2016 and 2020.  Also like in Circle, thus far, DOJ is not alleging any wrongdoing by Kraken or its customers.

The Summons, along with the DOJ’s press release, serves as another stern reminder to cryptocurrency users: federal tax laws apply to you!  And, it indicates a continued enforcement interest against those who attempt to use cryptocurrency’s “inherently pseudoanonymous aspect” to evade U.S. laws.

Failure to Cruise Past the Pleading Requirements in the Norwegian Cruise Lines Securities Class Action

On April 10, 2021, the United States District Court for the Southern District of Florida dismissed a securities class action complaint against Norwegian Cruise Lines (“NCL”) relating to the company’s disclosures made as the coronavirus pandemic was starting to unfold in the United States. In Douglas v. Norwegian Cruise Lines, et al., the court found the plaintiff failed to plead actionable misstatements or omissions and scienter for a claim of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

Thanks to the court’s thorough analysis, this decision serves as a useful overview to those wishing to cruise through the sea of corporate puffery, forward-looking statements, and scienter in the federal securities laws. Continue Reading

Another Diversity Suit Tossed on Forum Selection Grounds

This week, another shareholder derivative suit was dismissed based on a forum selection clause contained in the company’s bylaws. In November 2020, a shareholder filed a derivative action alleging that directors and officers of The Gap, Inc., an apparel company, had failed to create meaningful diversity on the Board of Directors on within the company’s leadership roles. The plaintiff also alleged that Gap made false statements about the diversity of the company’s workforce, as well as its efforts to increase diversity among its employees. Continue Reading

Pinterest Diversity Suits Multiply

Late last month, a new batch of plaintiffs filed a stockholder derivative suit against Pinterest, Inc., in Delaware Chancery Court, making similar allegations to those made in a pair of cases filed in the Northern District of California in 2019.

The plaintiffs allege that Pinterest executives ignored and failed to correct systemic race and gender discrimination across the company and retaliated against employees who voiced concerns about the problem. Continue Reading

SEC Speaks Out on SPACs, Highlights Legal Liability and Reporting Risks

SPACs seem to be having their moment in the financial world, especially in 2021.  In less than three months, U.S.-based SPACs have raised more money – almost $88 billion – than all SPACs combined in 2020 (which held the previous high for SPAC investment by some margin).  They have even reached a level of societal notoriety, as shown by this week’s cover of New York Magazine.  However, before SPACs and their supporters can carry this trend “to the moon,” the SEC chose this week to release two notices bringing SPAC fans back to earth.

Continue Reading

A Warning to Cryptocurrency Users from the Justice Department’s Tax Division

As you might expect during tax season, the Justice Department’s press releases seem particularly focused on tax-related issues these days.  At the start of this month, DOJ sent a stern reminder to the public that non-traditional currency users should not expect to escape federal tax law enforcement.

On April 1, the district court for the District of Massachusetts authorized a “John Doe” Summons to a company called Circle Internet Financial Inc. (“Circle”), allowing the IRS to obtain identifying information about U.S. taxpayers and customers of Circle who engaged in cryptocurrency transactions valued at $20,000 or more over the last 4 years (from 2016-2020), as well as their transaction records.  The government’s application did not accuse Circle or any of its customers of wrongdoing.  Instead, as reported in its announcement, the government argued that cryptocurrency can be difficult to trace and has an “inherently pseudo-anonymous aspect,” which makes it possible for taxpayers to use it to hide taxable income.  Granting the government’s application, U.S. Judge Richard G. Stearns found that there was a “reasonable basis for believing that [Circle’s cryptocurrency customers] . . . may have failed to comply with [federal tax laws].”  It is expected that the IRS will use the information obtained through this John Doe Summons to further its investigation of potential tax fraud by owners of cryptocurrency.

The Summons and accompanying press release warn all cryptocurrency users that virtual currency which can be converted to traditional currency is subject to federal tax laws and that the IRS plans to root out those who may try to hide reportable income through difficult-to-trace virtual transactions.  Guidance from the IRS on tax treatment of cryptocurrency can be found here.