Second Circuit

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The Second Circuit held yesterday that a government agency’s nonpublic, pre-decisional regulatory information does not constitute “property” for purposes of the federal insider-trading and wire-fraud statutes.  The decision in United States v. Blaszczak (2d Cir. Dec. 27, 2022) (“Blaszczak II”) effectively vacated convictions under those statutes for defendants who had traded on nonpublic, market-moving information that had been obtained from a government agency.

In a scathing opinion, Southern District of New York Judge Ronnie Abrams recently blasted the SEC’s standard demand that defendants settling with the Commission agree never to deny the allegations against them.  Judge Abrams’ decision in SEC v. Moraes reluctantly approved a consent decree containing the usual “no admit, no deny” provision in light of the Second Circuit’s recent decision upholding such provisions in SEC v. Romeril, in which Judge Abrams’ father (the famed First Amendment lawyer Floyd Abrams) represented the defendant in his unsuccessful petition for certiorari.  But Judge Abram expressed concern that the SEC’s insistence on such provisions violates the “unconstitutional conditions doctrine” and the First Amendment.

The Court of Appeals for the Second Circuit yesterday reversed the dismissal of a securities class action alleging fraud based on the defendants’ failure to disclose an SEC investigation into the company’s disclosed financial-control weaknesses.  The May 24, 2022 ruling in Noto v. 22nd Century Group, Inc. (No. 21-0347) is fact-specific, requiring disclosure of the investigation because the defendants (i) had disclosed the accounting deficiencies that had led to the investigation, (ii) had said they were working on the problem, and (iii) eventually had said they had resolved it, even though the SEC investigation had been pending during that entire period.

The Noto decision could affect disclosure assessments where issuers disclose an underlying accounting problem or other deficiency but are debating whether they must also disclose a pending SEC or other governmental investigation related to that specific problem.  Depending on the facts and circumstances of the particular situation, a court might hold that failure to disclose the governmental investigation makes the disclosure of the underlying problem materially misleading because nondisclosure of the investigation could cause reasonable investors to make “an overly optimistic assessment of the risk” posed by the underlying problem.

The Second Circuit recently held that a denial of a motion to dismiss a criminal indictment based on the Foreign Sovereign Immunities Act (“FSIA”) is immediately appealable under the collateral-order doctrine but concluded that even if FSIA did provide immunity from criminal prosecutions, that immunity would not extend to a…

The U.S. Court of Appeals for the Second Circuit held earlier this week that a company’s accurately reported financial statements are not misleading simply because they do not disclose that alleged misconduct might have contributed to the company’s financial results. The court also ruled that alleged misstatements made three to four years before the plaintiffs purchased the issuer’s securities were not material as a matter of law where an “outpouring of information” about the alleged misconduct followed those purported misstatements and preceded the plaintiffs’ securities purchases.

The decision in Plumber & Steamfitters Local 773 Pension Fund v. Danske Bank A/S (2d Cir. Aug. 25, 2021) squarely aligns the Second Circuit with other courts that have held that accurately reported financial results are not actionable even if undisclosed alleged misconduct purportedly contributed to the financial performance. The decision also highlights the need to consider whether a particular shareholder can be an optimal class representative where the complaint alleges a long class period.

The Second Circuit yesterday affirmed the insider trading conviction of the principal of a potential acquiror who, in breach of a nondisclosure agreement with a potential target company, had provided a tippee with nonpublic information about an impending acquisition of the target. The decision in United States v. Chow held that:

  • The nondisclosure agreement (“NDA”) between the transaction parties created a duty to keep information about the potential transaction confidential and not to use it for any purpose other than the transaction;
  • The defendant tipper violated that agreement by providing information to the tippee, who purchased significant amounts of the target’s shares before the transaction was announced;
  • The evidence supported the jury’s finding that the tipper had intentionally provided material, nonpublic information (“MNPI”) to the tippee; and
  • The tipper had received a sufficient personal benefit in exchange for providing MNPI.

The Second Circuit has recently held that the Government must account for rental income it denied a property owner during a period of illegal seizure even though the Government was able to establish probable cause at a post-seizure hearing. The appeal stemmed from a decades-long sanctions and civil forfeiture action…

The U.S. Court of Appeals for the Second Circuit reaffirmed yesterday that the federal securities laws do not apply to “predominantly foreign” securities transactions even if those transactions might have taken place in the United States.  The ruling in Cavello Bay Reinsurance Ltd. v. Shubin Stein (No. 20-1371) reinforces the Second Circuit’s prior decisions concerning the scope of the transaction-based test that the U.S. Supreme Court announced in Morrison v. National Australia Bank in an effort to curb the extraterritorial application of the federal securities laws.