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In Jensen v. iShares Trust, 2020 Cal. App. LEXIS 61 (Cal. App. Jan. 23, 2020), a rare state court decision addressing claims under the Securities Act of 1933 (“1933 Act”), the California Court of Appeal rejected plaintiffs-appellants’ attempt to evade the “tracing” requirement under Section 11, 15. U.S.C. § 77k, which provides standing only to those plaintiffs who can trace their shares purchased in a secondary market transaction to an initial offering made under a misleading registration statement.  Appellants argued that they were not subject to the tracing requirement because the respondent, an open-end management investment company, also was governed under the Investment Company Act of 1940 (“ICA”), 15 U.S.C § 80a, et. seq., which appellants argued extends standing to purchasers no matter how or from whom their shares were purchased.  The Court rejected the argument, unequivocally reaffirming that the 1933 Act is focused only on initial public offerings and other primary market transactions, and so any claims brought thereunder must satisfy its strict standing (i.e., tracing) requirements.
Continue Reading California State Court Declines to Expand Standing for Claims Under 1933 Act

Two recent decisions, one from the Delaware Court of Chancery and one from the California Court of Appeal, Fourth Appellate District, refused to apply bylaws that impaired a shareholder/member plaintiff’s ability to pursue his or her claims against the corporation where the the relevant bylaw was adopted after the plaintiff’s claims accrued.
Continue Reading California and Delaware Courts Agree: Amendments to Corporate Bylaws Do Not Apply Retroactively to Impair Pursuit of Previously Accrued Claims

In Stratte-McClure v. Morgan Stanley, No. 13-0627-cv, 2015 WL 136213 (2d Cir. Jan. 12, 2015), the United States Court of Appeals for the Second Circuit affirmed the dismissal of securities fraud claims against Morgan Stanley arising out of its exposure to and losses from a proprietary subprime mortgage trade in 2007.  In reaching its decision, the Second Circuit held that a failure to make a disclosure required by Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii), may serve as a basis for a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.  The Second Circuit recognized that its holding regarding Item 303 of Regulation S-K was directly “at odds” with the 2014 decision of the United States Court of Appeals for the Ninth Circuit in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014).  Morgan Stanley establishes a circuit split between the Second and Ninth Circuits on the issue of whether failure to make adequate disclosures under Item 303 may serve as the basis for Section 10(b) claims, potentially warranting review by the United States Supreme Court.
Continue Reading Second Circuit Notes Split with Ninth Circuit Over Whether Failure to Make Adequate Disclosures Under Item 303 of Regulation S-K May Serve as Basis for a Section 10(b) Claim

In Jones v. Martinez, 230 Cal. App. 4th 1248 (2014), the California Court of Appeal, Second Division, held that a plaintiff asserting a shareholder derivative action against directors of a Delaware corporation in a California state court may not obtain discovery before the plaintiff establishes legal standing to sue derivatively as required under Delaware law.  Under Delaware law, a stockholder-plaintiff may not prosecute a derivative suit unless he alleges that he demanded that the directors pursue the claim and the directors have wrongfully refused to do so, or that such demand is excused because it would have been futile.  In order for pre-suit demand to be excused as futile, the stockholder-plaintiff must plead particularized facts creating reasonable doubt that the directors were unlikely to act in good faith in considering the demand.  Delaware courts hold routinely that a derivative plaintiff is not entitled to discovery unless and until he has met the threshold standard for pleading demand futility.  The decision in Jones marks the first time that a California appellate court has applied this rule to a derivative plaintiff suing in California state court under Delaware law.
Continue Reading California Court of Appeal Applies Delaware Law to Deny Discovery in Shareholder Derivative Action