A federal district court in Virginia recently held that the federal securities laws can apply to transactions in a foreign issuer’s unsponsored American Depositary Receipts (“ADRs”) that traded over the counter in the United States. However, the court ruled that statements by the foreign issuer’s U.S. subsidiary had not been sufficiently attributed to the foreign parent so that they could be deemed to have been made “in connection with” purchases of the parent’s ADRs.
Current Issues Relating to Silicon Valley Bank Closure
On Friday, March 10, 2023, Silicon Valley Bank (“SVB”) became the largest U.S. lender since the Great Financial Crisis to enter into receivership with the Federal Deposit Insurance Corporation. SVB was a major provider of depository services and liquidity to various investment funds, managers and their related entities through subscription or capital call facilities, net asset value facilities and management company, GP and co-invest lines. The SVB situation is continuing to evolve and we expect to see material developments in the coming days.
For more details on this current development, read the full client alert here.
Fourth Circuit Reverses Mid-Trial Grant of Judgment Against SEC in Insider-Trading Case
On February 23, the U.S. Court of Appeals for the Fourth Circuit reversed a mid-trial grant of judgment as a matter of law against the Securities and Exchange Commission in a jury trial for insider trading. The decision in SEC v. Clark is a reminder that the SEC can meet its burden of proof by presenting merely circumstantial, rather than direct, evidence of insider trading and that a trial court must not weigh evidence, determine witnesses’ credibility, or substitute its judgment for the jury’s in deciding whether to grant a motion for judgment as a matter of law.
Fraud Claims Against Token Issuer Dismissed Based on Disclosures to Accredited Investor
The organizers of an initial coin offering (ICO) recently won dismissal of an investor’s fraud claims by establishing that their public risk disclosures negated the investor’s claims of reliance on alleged misstatements. The project, a video service provider’s ICO, was governed by a purchase agreement called a “Simple Agreement for Future Tokens” (“SAFT”). The plaintiff investor later lost his entire investment as the token collapsed, allegedly due to the provider’s decision to scrap its initial plans for a decentralized platform and move to a permissioned blockchain (and also the provider’s choice to seek additional capital via a “Regulation A” public offering). The New York court found that even if certain representations made by the issuer regarding the prospect of a decentralized network were actionable, the Plaintiff had not plausibly alleged “reasonable reliance” on such representations in signing the SAFT. (Rostami v. Open Props, Inc., No. 22-03326 (S.D.N.Y. Jan. 9, 2023)).
Ninth Circuit Applies Lower Standard for Pleading Scienter Under § 14(e) of Securities Exchange Act Even as to Opinions
The U.S. Court of Appeals for the Ninth Circuit ruled last week that the securities-law requirement to plead a “strong inference” of scienter does not apply to claims under § 14(e) of the Securities Exchange Act even where the challenged statement is a statement of opinion. The decision in Grier v. Finjan Holdings, Inc. (In re Finjan Holdings, Inc. Securities Litigation) (9th Cir. Jan. 20, 2023) held that, because § 14(e) claims – which arise in connection with tender offers – can be based on mere negligence instead of knowing or reckless misconduct, a plaintiff needs to plead only a “reasonable inference,” rather than a “strong inference,” of an opinion’s subjective falsity.
Fifth Circuit Revives Securities Class Action Against Six Flags
Last week, the Fifth Circuit reversed a decision from the United States District Court for the Northern District of Texas that had dismissed a class action against Six Flags Entertainment Corporation. The complaint in Oklahoma Firefighters Pension and Retirement System v. Six Flags Entertainment Corp., et al., alleged Six Flags and its former CEO and CFO violated federal securities laws in connection with statements regarding the construction of new theme parks in China. In overturning the lower court’s decision, the Fifth Circuit provided important guidance regarding the weight of confidential witness allegations in securities class actions, as well as evaluating legal doctrines on forward-looking statements, puffery, and scienter.
Shining a Light on the Corporate Transparency Act: FinCEN’s Rules for Beneficial Ownership Reporting
On January 1, 2021, Congress enacted the Corporate Transparency Act as part of the Anti-Money Laundering Act of 2020 to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” FinCEN issued the final rule on Beneficial Ownership Information Reporting Requirements on September 29, 2022 requiring a range of entities, primarily smaller, otherwise unregulated companies, to file a report with FinCEN identifying the entities’ beneficial owners—the persons who ultimately own or control the company—and provide similar identifying information about the persons who formed the entity. On December 16, 2022, FinCEN proposed the Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities rule laying out the protocols for access to the beneficial ownership database by authorized recipients, while still maintaining the highest levels of data protection and oversight.
