Securities Litigation

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In Sciabacucchi v. Salzberg, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court reversed a Delaware Court of Chancery (Laster, V.C.) decision declaring invalid a federal forum selection provision in a Delaware corporation’s charter or bylaws.  The federal forum selection provision was intended to require claims by investors under the Securities Act of 1933 (“1933 Act”) to be brought solely in federal court, thereby avoiding the likelihood of defending duplicate, concurrent state and federal court 1933 Act claims.  The Delaware Supreme Court’s decision provides clear guidance to companies preparing for securities offerings for implementing a tool to limit the cost of defending duplicative 1933 Act litigation.
Continue Reading Delaware Supreme Court Confirms That Federal Forum Provision Is Facially Valid, Reversing Court of Chancery

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

Sinatra may have found success in the city that never sleeps, but a California court has just made it more difficult for any party doing business with a California resident to do the same.  At least, when it comes to resolving disputes without a jury in a New York courtroom, or in the courtroom of any other jurisdiction that enforces pre-dispute jury trial waivers.  This case will be of major interest to commercial lenders, and other businesses, who prefer to use states like New York and Delaware as their jurisdiction of choice for governing law and adjudicating disputes.

While it is well-settled law in California that pre-dispute contractual jury waivers are unenforceable (see, e.g., Grafton Partners L.P. v. Superior Court (2005) 36 Cal. 4th 944 (“Grafton”)), in most instances forum selection and choice-of-law provisions have been respected by California courts. However, the Court of Appeal for the First Appellate District recently expanded upon Grafton in Handoush v. Lease Financing Group, LLC. The Court dealt a commercial equipment lessor a significant blow by holding that the equipment lessee who signed a lease agreement with the lessor that was governed by New York law, identified New York as the appropriate forum for resolving disputes and included a pre-dispute jury waiver (which is enforceable under New York law), was nevertheless entitled to a trial by jury in California.
Continue Reading Start Spreadin’ the News: California Court Says No to New York, New York; Rejects Forum Selection Clause

In North Sound Capital, LLC v. Merck & Co, Inc., No. 18-2317, 2019 WL 4309663, 2019 U.S. App. LEXIS 27518 (3d Cir. Sept. 12, 2019), the United States Court of Appeals for the Third Circuit reversed a New Jersey district court ruling, which held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precluded state law claims in lawsuits brought by investors who opted-out of class action lawsuits. In reversing, the Third Circuit determined that the opt-out plaintiffs could indeed bring their state law fraud claims against the same defendants as the class action lawsuits because their subsequently filed suits did not fall within the definition of a “covered class action” under SLUSA. The decision provides helpful guidance as to whether investors who choose to opt-out of class action lawsuits may be precluded under SLUSA from proceeding with individual lawsuits seeking similar relief.
Continue Reading Third Circuit Holds that SLUSA Does Not Preclude Class Action Opt-Outs from Pursuing Individual Actions

In In re Everquote, Inc. Securities Litigation, 2019 N.Y. Slip Op. 29242, No. 651177/2019, 2019 WL 3686065 (Sup. Ct. N.Y. Cnty. Aug. 7, 2019), Justice Andrew Borrok of the New York County Commercial Division stayed discovery pending a motion to dismiss a federal securities class action pursuant to the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), diverging from the handful of state courts that have grappled with that statute’s application since the Supreme Court’s ruling last year in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S.Ct. 1061 (2018) (“Cyan”). The PSLRA provides for an automatic discovery stay pending adjudication of motions to dismiss private securities actions, and has been interpreted to be a procedural mechanism meant to curb litigation abuses in securities cases. See 15 U.S.C. § 77z(b)(1). In his decision, Justice Borrok joined the ever-growing list of judges tasked with deciding whether such mechanisms apply to state court securities litigation in the wake of Cyan.
Continue Reading New York Commercial Division Justices Provide Dueling Approaches to Discovery Stays in State Court Securities Litigation

In Lorenzo v. Securities & Exchange Comm., No. 17-1077, 2019 WL 1369839 (U.S. Mar. 27, 2019), the Supreme Court of the United States (Breyer, J.) held that an individual who did not “make” a false or misleading statement within the meaning of Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (blog article here), but instead disseminated it to potential investors with intent to defraud, can be held to have employed a scheme to defraud and/or engaged in an act, practice or course of business to defraud in violation of subsections (a) and (c) of Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. This decision broadens the scope of primary liability under Rule 10b-5 beyond those who make false and misleading statements to include those who knowingly “disseminate” (i.e., communicate to potential investors) such false or misleading statements. Although this decision involved an SEC enforcement action, it is likely to be invoked by plaintiffs in private securities litigation to expand the scope of named defendants beyond the issuer and individuals directly responsible for making public statements on the issuer’s behalf.
Continue Reading United States Supreme Court Holds That Knowing Dissemination of False Statements Made by Others Can Constitute Primary “Scheme Liability” In Violation of Rule 10b-5(a) and (c)

In Singh v. Cigna Corp., No. 17-3484-cv, 2019 U.S. App. LEXIS 6637 (2d Cir. Mar. 5, 2019), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a class action complaint that purported to base a securities fraud claim upon alleged statements made by defendant Cigna Corporation (“Cigna” or the “Company”) about its efforts to comply with Medicare regulations. According to the complaint, the statements materially misled investors and, when news of regulatory non-compliance surfaced, the Company’s stock price declined. The Second Circuit held the statements to be only “generic” descriptions of the Company’s compliance efforts. The Court held that no reasonable investor would rely upon them as “representations of [the Company’s] satisfactory compliance,” and so they did not constitute material misstatements sufficient to support a securities claim.
Continue Reading Second Circuit Holds That Issuer’s Alleged Statements Concerning Its Regulatory Compliance Efforts Do Not Constitute Material Misstatements

In the aftermath of Equifax’s data breach, a federal court recently found that allegations of poor cybersecurity coupled with misleading statements supported a proper cause of action. In its decision, the U.S. District Court for the Northern District of Georgia allowed a securities fraud class action case to continue against Equifax. The lawsuit claims the company issued false or misleading statements regarding the strength and quality of its cybersecurity measures. In their amended complaint, the plaintiffs cite Equifax’s claims of “strong data security and confidentiality standards” and “a highly sophisticated data information network that includes advanced security, protections and redundancies,” when, according to the plaintiffs’ allegations, Equifax’s cybersecurity practices “were grossly deficient and outdated” and “failed to implement even the most basic security measures.” The court found that data security is a core aspect of Equifax’s business and that investors are likely to review representations on data security when making their investment decisions.
Continue Reading Court Finds Cybersecurity-Related Claims Sufficient in Securities Class Action

In Nielen-Thomas v. Concorde Investment Servs., LLC, No. 18-2875, 2019 WL 302766 (7th Cir. Jan. 24, 2019), the United States Court of Appeals for the Seventh Circuit held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub. L. 105-353, 112 Stat. 3227, bars all putative class actions brought by private plaintiffs in a representative capacity under state law, regardless of the estimated size of the class. The Seventh Circuit’s decision effectively eliminates the ability of a single plaintiff in a securities class action to represent a putative class of unnamed persons in any State within the Seventh Circuit (Illinois, Wisconsin and Indiana).  
Continue Reading Class Size Doesn’t Matter—Seventh Circuit Holds That Federal Law Bars Private Securities Class Actions Brought Under State Law Regardless of the Number of Putative Class Members

In Drulias v. 1st Century Bancshares, Inc., No. H045049, 2018 WL 6735137 (Cal. App. Dec. 21, 2018), the California Court of Appeal, Sixth Appellate District, affirmed an order staying a stockholder lawsuit brought in the Superior Court of California, Santa Clara County, on forum non conveniens grounds based upon enforcement of an exclusive Delaware forum selection bylaw. This decision confirms that California courts will enforce forum selection bylaws designating Delaware as the exclusive venue for intra-corporate claims. 
Continue Reading California Court of Appeal Enforces Delaware Forum Selection Bylaw