federal securities law

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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.

One of the most significant differences between bringing a securities lawsuit in state versus federal court is the application of the mandatory discovery stay set forth in the Private Securities Litigation Reform Act (the “PSLRA”).  Following the enactment of the PSLRA in 1995, federal courts must stay discovery in securities-law cases until after a complaint has survived a pleadings challenge, i.e., a motion to dismiss.  State courts have been divided on whether such a stay is mandatory in securities-law cases brought before them as well.  Now, a software company facing a challenge under the Securities Act of 1933 in California state court has been granted leave to argue before the United States Supreme Court that the PSLRA’s discovery stay equally applies in state courts.

On June 30, 2021, the SEC posted six Notices of Covered Actions, for which individuals have 90 calendar days to apply for a whistleblower award.  As discussed in our prior post, the SEC publishes Notices for cases in which the final judgment or order, by itself or together with other prior judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million.

In this post, we briefly survey the six June 2021 Notices of Covered Actions.

SPACs remain on everyone’s mind, especially the country’s chief regulator.  On May 26, 2021, SEC Chair Gary Gensler testified before the U.S. House Subcommittee on Financial Services and General Government on “key capital market trends” that will impact SEC resources in the coming years. And the very first topic he raised – Initial Public Offerings and Special Purpose Acquisition Companies – was of no surprise to most market watchers.

If 2020 was the “Year of the SPAC,” 2021 may be turning into the year of the SPAC class action. We have already followed numerous cases where recently formed SPACs have been challenged in federal court for alleged violations of federal securities laws. Although those cases are still pending, a district court recently delivered a notable ruling on a SPAC created far in the distant past, as far as SPACs are concerned: 2017.

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.

A shareholder derivative action which had alleged that Facebook’s lack of diversity caused a negative effect on its stock price was rejected by a California federal magistrate judge last week.

The court held that the shareholder plaintiff had not pled demand futility with particularity, as required by Fed. R. Civ. P. 23.1, because she had not “plausibly alleged any facts about the directors’ actual or constructive knowledge . . . their failure to act, or their lack of independence.” Labeling the plaintiff’s allegations as “conclusory,” the court held that the complaint contained inaccurate factual allegations and that the plaintiff “did not plead plausible facts about discriminatory practices,” of the Company. Because the allegations that Facebook’s directors ignored red flags were “contradicted by the record,” and the alleged events occurred before four of the directors joined Facebook’s board, the court held the complaint was unsustainable.

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.