In McDaniel v. Wells Fargo Investments, LLC, Nos. 11-17017, 11-55859, 11-55943, 11-55958, 2013 WL 1405949 (9th Cir. Apr. 9, 2013), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of four class action lawsuits filed by employees against brokerage firms Wells Fargo, Bank of America, and Morgan Stanley. In separate lawsuits, the employees alleged that the brokerage firms’ policies prohibiting employees from opening outside self-directed trading accounts violates Section 450(a) of the California Labor Code, which prohibits employers from forcing its employees to patronize his or her employer. The Ninth Circuit held that the California statute is preempted by the Section 15(g) of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78o(g), which requires brokerage firms to take measures reasonably designed to prevent employees from engaging in insider trading. This case of first impression in California reassures brokerage firms that compliance with the securities laws will not violate California labor laws.Continue Reading Ninth Circuit Holds that Federal Securities Laws Preempt California Labor Code’s Ban on Forced Patronage at Brokerage Firms

In a recent Securities & Exchange Commission (“SEC”) investigation, the SEC interviewed three persons who had proffer agreements with the SEC and United States Attorney. In a subsequent SEC enforcement action, a defendant served interrogatories asking the SEC to identify the factual information disclosed in those proffer sessions. The SEC objected, and the defendant moved to compel. The SEC opposed the motion to compel, arguing that defendant sought information protected by the attorney work product doctrine, had not shown substantial need and unavailability, and had not deposed any of the witnesses, despite their identification in Rule 26 disclosures more than a year before. The magistrate judge granted defendant’s motion to compel, and the United States District Court for the Northern District of California confirmed the ruling. SEC v. Sells, No. C 11-4941 CW, 2013 WL 1411247 (N.D. Cal. Apr. 8, 2013).Continue Reading District Court Grants Motion to Compel Against SEC, Holding that “Facts” Are Not Work Product In SEC Confidential Witness Interviews

In Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, 2013 WL 1628935 (U.S. Apr. 17, 2013), the Supreme Court of the United States addressed the circuit split that arose following the 2010 decision of the United States Court of Appeals for the Second Circuit in Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010). As previously reported (see also blog articles here and here), the Second Circuit in Kiobel held that tort liability under the Alien Tort Statute, 28 U.S.C. § 1350 (“ATS”), for violations of international law does not extend to corporations because corporate liability is not yet considered a norm of customary international law. The Ninth Circuit, District of Columbia Circuit, Seventh Circuit and Eleventh Circuit all reached the opposite conclusion. Although Kiobel was appealed to the Supreme Court on this narrow issue of corporate liability, the Supreme Court addressed the broader question of whether the ATS applies to conduct by anyone, whether individual or corporate, that occurs solely outside the United States. The Supreme Court held that the ATS does not apply to such foreign-only conduct. This decision confirms that, with rare exceptions, corporations cannot be held liable in federal courts for torts predicated on violations of international law that occur wholly in a foreign country.Continue Reading United States Supreme Court Decides Question of Corporate Liability Under Alien Tort Statute On Broader Grounds

Two decisions earlier this year by the Delaware Court of Chancery in which the Court (Noble, V.C.) reached opposite conclusions on the divergent facts before it, serve to highlight that determining whether a bidder is “serious” in its pursuit of the target is a key factor in analyzing a target director’s liability for “bad faith” in the context of a merger and acquisition (“M&A”) sales process under Delaware law.Continue Reading Delaware Chancery Court Decisions Highlight That a “Crucial Difference” In Analyzing Director Liability For “Bad Faith” In the Context of an M&A Sales Process Is the Seriousness of the Bidder

In Pyott v. Louisiana Municipal Police Employees’ Retirement System, No. 380, 2012, 2013 WL 1364695 (Del. Apr. 4, 2013), the Delaware Supreme Court held the Delaware Court of Chancery erred in refusing to dismiss a derivative complaint nearly identical to one brought by different stockholders in federal court in California, which the federal court had earlier dismissed for failure to plead demand futility. According to the Supreme Court, the Chancery Court’s constitutional obligation to give full faith and credit to other state and federal judgments required it to apply California (not Delaware) collateral estoppel law, and that law clearly precluded the Delaware action. The Supreme Court also held the federal plaintiffs’ failure to first conduct a books and records inspection of Section 220 of the Delaware General Corporation Law (“Section 220”), 8 Del. Code § 220, before filing suit did not, by itself, give rise to an irrebuttable presumption that they had inadequately represented the corporation. The Court of Chancery had applied such presumption in further refusing to dismiss the Delaware action on collateral estoppel grounds. This decision provides greater certainty to Delaware corporations hit with derivative actions in multiple jurisdictions.Continue Reading Delaware Supreme Court Affirms Preclusive Effect of Non-Delaware Dismissals and Rejects Irrebuttable Presumption That a Derivative Plaintiff Who Fails to Conduct a Section 220 Inspection Is an Inadequate Representative

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP, 2013 WL 911118 (Del. Ch. Feb. 22, 2013, rev. Mar. 8, 2013), the Delaware Court of Chancery held that a reverse triangular merger does not result in an assignment of the assets of the surviving entity by operation of law. Although the Meso Scale Diagnostics decision confirms, at least under Delaware law, the long-standing view of many practitioners that a reverse triangular merger does not result in an assignment by operation of law, it does not directly affect the contrary position taken by the United States District Court for the Northern District of California in SQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 19, 1991), that under California law a reverse triangular merger does constitute an assignment by operation of law. As a result, foreign (i.e., non-California) corporations in California subject to Section 2115 of the California Corporations Code (“Section 2115”) must consider the holdings in Meso Scale Diagnostics and SQL Solutions when analyzing the effect that an acquisitions may have on contractual anti-assignment provisions.Continue Reading Delaware and California Courts Split as to Whether a Reverse Triangular Merger Results In an Assignment By Operation of Law, Creating Potential Pitfalls for Delaware and Other Foreign Corporations Located in California

In City of Livonia Employee Retirement System v. Boeing Co., Nos. 12-1899, 12-2009 2013 WL 1197791 (7th Cir. Mar. 26, 2013), the United States Court of Appeals for the Seventh Circuit (Posner, J.) affirmed the dismissal of a securities fraud class action against the Boeing Company (“Boeing”) and remanded the question of whether sanctions under Rule 11 of the Federal Rules of Civil Procedure should be levied against plaintiffs’ counsel after allegations attributed to a confidential witness, which initially saved the case from dismissal, were later denied by the witness. The Court’s ruling provides a strong reminder that plaintiffs’ counsel in securities cases must exercise great care when using allegations of confidential witnesses to satisfy the heightened pleading standards of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (“Reform Act”).Continue Reading Seventh Circuit Affirms Dismissal of Securities Fraud Class Action, Remanding Question of Sanctions Against Plaintiffs’ Counsel

This article was originally published by the Daily Journal.

In a recent panel discussion, one of the speakers was a so-called "ethical hacker" – a hacker-turned-protector of employers’ confidential information. As someone at the forefront of cyberattacks, the ethical hacker’s opinion was that there are two types of employers: those that know they have been hacked, and those that do not. And with all of the press coverage regarding recent hacks into U.S. confidential security information, it seems our ethical hacker may well be right. Indeed, in March, James Clapper, the director of National Intelligence to the U.S. Senate Intelligence Committee, suggested that cyberattacks now pose the most dangerous immediate threat to the U.S.Continue Reading Cyberattacks a mounting challenge for employers

As previously reported (click here), the payment of certain severance benefits may be exempt from FICA taxes. Under the Sixth Circuit’s decision in Quality Stores (click here), severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (“supplemental unemployment compensation benefits”) are not subject to FICA taxes. The request by the IRS for an en banc review of the Quality Stores decision was denied by the Sixth Circuit. The Supreme Court has granted the government’s request for a one-month extension to file its petition for certiorari, extending the due date from April 4 to May 3.Continue Reading Deadline for Filing FICA Tax Refunds is April 15

In Levitt v. J.P. Morgan Securities, Inc., No. 10-4596, 2013 WL 1007678 (2d Cir. Mar. 15, 2013), theUnited States Court of Appeals for the Second Circuit reversed a district court order certifying a class of shareholder fraud plaintiffs in a lawsuit against J.P. Morgan Securities, Inc. and J.P. Morgan Clearing Corporation (“J.P. Morgan”). The decision reaffirms that a clearing broker generally owes no fiduciary duty to the owners of securities that pass through its hands. According to the Second Circuit, absent evidence that the clearing broker instigated or directed the alleged fraud by the securities issuer through high involvement, a plaintiff cannot establish a class-wide presumption of investor reliance sufficient to satisfy the predominance requirement of Rule 23(b)(3) of the Federal Rules of Civil Procedure.Continue Reading Second Circuit Reverses Class Certification Order, Holding That a Clearing Broker’s Alleged Knowledge of Fraud Against Shareholders, Absence Direct Involvement, Is Insufficient to Create a Duty of Disclosure