Securities Class Actions

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The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which Ripple sold or distributed XRP did not involve the sale of unregistered securities. In particular, the court held that Ripple’s program to sell XRP to public buyers on digital asset exchanges, as well as its distribution of XRP as compensation to employees and third parties, did not constitute the offer or sale of securities. The court also rejected the SEC’s arguments that Ripple used the institutional buyers as underwriters to sell XRP to the public. The opinion, if followed by other courts in pending litigation with the SEC, could have a far-reaching impact on the cryptocurrency markets, especially with respect to secondary market crypto trades on digital asset exchanges.               

The U.S. District Court for the Southern District of New York recently rejected a proposed settlement of a securities class action involving purchasers of digital tokens due to concerns about whether the lead plaintiff had adequately represented the class for settlement purposes.  Judge Lewis A. Kaplan held in Williams v. Block.one that the federal securities laws did not appear to apply equally to all class members’ token purchases and that the lead plaintiff had not produced evidence showing that its own purchases were (or were not) subject to the securities laws in a proportion similar to other class members’ purchases.

The spate of shareholder actions against biotech companies relating to COVID-19 treatments shows no signs of stopping, and now, derivative lawsuits are following the initial wave of securities class actions.  For example, late last week, a shareholder of CytoDyn, Inc., brought a derivative action against certain officers and directors of the company.  CytoDyn is a biotechnology company that has focused on the development and commercialization for a drug called “Leronlimab,” what was promoted as a potential therapy for HIV.  According to the complaint, in 2020, CytoDyn began promoting Leronlimab as a treatment for COVID-19, causing its stock price to rise.  But when it came out that marketing Leronlimab as a COVID-19 treatment was not a commercially viable development for the company, the complaint alleges CytoDyn’s shares dropped significantly.

Private companies with cutting-edge technology have become particularly attractive targets for special purpose acquisition companies (SPACs). These private companies may choose to go public via SPAC for a number of reasons that include the ability to share projections with investors, better valuation prospects and deal execution certainty. Much like companies that go public by way of a traditional IPO, however, companies that go public via SPAC can also become subject to Section 10(b) securities class actions. The risk for this type of company may be particularly acute given its high growth prospects or the volatility that may accompany its securities. An example of a company that went public via SPAC that was quickly confronted with this type of action is Velodyne.

The Supreme Court ruled today that judicially created principles that toll statutes of limitations for class members in timely filed class actions apply only to subsequently filed individual actions, not to follow-on class actions filed outside the limitations period. The decision in China Agritech, Inc. v. Resh (No. 17-432) thus eliminates the specter of a potentially infinite series of class actions in which each class representative claims that limitations periods were tolled by the pendency of the prior class actions.

China Agritech was a securities class action under the Securities Exchange Act of 1934, which has a five-year statute of repose that sets an untollable outer limit on the filing of claims. But many other causes of action are not governed by statutes of repose. The China Agritech decision should have particular impact on those types of cases.

The Second Circuit held today that putative securities class actions involving transactions in non-U.S.-listed securities require careful scrutiny to determine whether the class members’ claims can be litigated on a classwide basis. The court’s ruling in In re Petrobras Securities (No. 16-1914) will likely increase the difficulty of certifying securities…