Securities Law Alert
In This Edition:• Supreme Court: Will Hear Case on Whether SEC Administrative Proceeding Can Be Challenged as
Unconstitutional While Administrative Proceeding Is Ongoing• Second Circuit: No Duty to Disclose Payment for Promotional Articles Where Payor Did Not Have
Ultimate Control Over the Articles• Ninth Circuit: Forum-Selection Clause Does Not Contravene Strong Public Policy Even Where It
Forecloses Ability to Bring Section 14(a) Claims• Eleventh Circuit: SLUSA Held to Bar Class Action for Breach of Fiduciary Duty Claims Brought Under
State Law
June 2022“Recognized for its‘world class lawyering,’
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Supreme Court: Will Hear
Case on Whether SEC
Administrative Proceeding
Can Be Challenged as
Unconstitutional While
Administrative Proceeding Is
Ongoing
On May 16, 2022, the Supreme Court
announced that it would consider whether adefendant in an ongoing SEC administrative
proceeding can sue directly in federal district
court to challenge the SEC’s adjudicationas unconstitutional—on the ground that the
SEC’s in-house administrative law judges(“ALJs”) are unconstitutionally protectedfrom removal—or whether the defendantmust first complete a lengthy administrative
process before being able to challenge
the adjudication in federal court.1 SEC v.
Cochran, (No. 21-1239).
1. The administrative process includes a full hearing before an
ALJ, appeal of the ALJ’s decision to the Commission, andappeal of the Commission’s final order to a circuit court.

Simpson Thacher & Bartlett LLP

The case relates to an ongoing SEC
enforcement proceeding against a CPA
alleging that she failed to comply with PublicCompany Accounting Oversight Board(“PCAOB”) auditing standards. While theenforcement proceeding was pending, thedefendant CPA filed suit in federal district
court to enjoin the proceedings, claimingthat SEC ALJs were unconstitutionallyinsulated from presidential removal. The
Fifth Circuit held en banc that the defendant
CPA could challenge the constitutionality of
the ALJs in district court before undergoingan administrative adjudication, on the basisthat the Exchange Act did not “explicitly
or implicitly strip” the district court ofjurisdiction to hear structural constitutional
claims challenging SEC administrative
proceedings. Cochran v. SEC, 20 F.4th 194(5th Cir. 2021) (Haynes, J). Notably, Cochranjoins another case, Axon Enterprise v. FTC,
21-86, which is already before the Supreme
Court concerning largely the same issue.
However, the Ninth Circuit reached the
opposite result in Axon, holding that a district
court lacks jurisdiction to hear constitutional
challenges to ongoing FTC proceedings. Axon

Enter. v. FTC, 986 F.3d 1173 (9th Cir. 2021).
The Supreme Court has consolidated thebriefing schedules for the two cases, but thecases will be argued separately.

The Fifth Circuit Holds That a Claim
Challenging the Constitution of the
Tribunal Falls Outside of Section
78y of the Exchange Act
The SEC argued before the Fifth Circuitthat Section 78y implicitly stripped district
courts of jurisdiction to hear structural
constitutional claims. However, the Fifth
Circuit pointed out that Section 78y provides
that only those aggrieved by a final orderof the Commission may petition to review
that final order. The court observed that thestatute does not address those who have notyet received a final order of the Commission
or whose claims have nothing to do withany final order that the Commission might
one day issue. Concluding that the claim felloutside of Section 78y, the court observedthat the CPA’s claim challenged the tribunal’s
constitution, not the legality or illegality of its
final order.

The Fifth Circuit Concludes
That Free Enterprise Fund v.
PCAOB Applies
The Fifth Circuit stated that the Supreme
Court had already rejected the SEC’s precise
jurisdictional argument under Section 78y
in Free Enterprise Fund v. PCAOB, 561 U.S.
477 (2010). In Free Enterprise Fund, the
PCAOB inspected an accounting firm, issued
a report criticizing its auditing practices,and opened a formal investigation. The
accounting firm sued in federal district court,
seeking a declaratory judgment that the
PCAOB was unconstitutionally structured

and arguing that the PCAOB’s double
for-cause removal protection violated thePresident’s Article II removal power. The
government in Free Enterprise Fund argued
that Section 78y deprived the district courtof jurisdiction to hear the accounting firm’s
constitutional challenges. The Supreme Court
disagreed, holding that the text of Section
78y does not expressly or implicitly limit thejurisdiction of the district court. The Fifth
Circuit described Free Enterprise Fund as“squarely on point,” and concluded that it
foreclosed any possibility that Section 78y
strips district courts of jurisdiction overstructural constitutional challenges. However,the Fifth Circuit’s conclusion concerning
Free Enterprise Fund conflicts with rulings
from other circuits, including the Second
Circuit, which have concluded that Section
78y implicitly strips jurisdiction over prefinal
challenges to enforcement proceedings.2 The
Supreme Court will consider the issue in its
upcoming term.

Second Circuit: No Duty
to Disclose Payment for
Promotional Articles Where
Payor Did Not Have Ultimate
Control Over the Articles
On May 24, 2022, the Second Circuit affirmedin part the dismissal of a putative securities
fraud class action alleging that a company, its
former CEO, and former CFO engaged in an
illegal stock promotion scheme by allegedly
concealing that they paid authors to write
2. See, i.e., Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016) (Exchange
Act precluded district court jurisdiction over an Appointments
Clause challenge to an ongoing SEC proceeding); Bennett
v. SEC, 844 F.3d 174 (4th Cir. 2016) (Section 78y precluded
district court jurisdiction over a removal power claim).

2promotional articles about the company.
Noto v. 22nd Century Grp., 2022 WL
1633827 (2d Cir. 2022) (Walker, J.). The
court held that plaintiffs failed to state a claimthat the existence of the stock promotion
scheme constituted a materially misleadingomission because the complaint did notadequately allege that defendants had a duty
to disclose that they paid for the articles’
publication. The court held that “only anarticle’s maker, not its benefactor, has a duty
to disclose that it was paid for.”misstatements included in its client mutual
funds’ prospectuses because “the makerof a statement is the person or entity withultimate authority over the statement,
including its content and whether and how
to communicate it.” The mutual funds inJanus were determined to be the makers of
the statements in the prospectuses because
they filed the prospectuses with the SEC and
had ultimate control over their content, while
the investment advisor was not a “maker,”even if he was involved in the preparation of
the prospectuses.

Background and Procedural History
In 2017, various writers published positive
online articles about the prospects forthe company’s stock. Many of the articles
repeated statements from company press
releases, FDA press releases, and the CEO’s
statements in earnings calls, presentations,and at conferences. Defendants paid thewriters to publish the articles, but did notdisclose that the company was compensating
the writers. Subsequently, the company’s
stock price fell after articles were published
online claiming that the company had
engaged in a paid stock promotion scheme toillegally inflate its share price. Plaintiffs sued
claiming that defendants violated Section
10(b) of the Exchange Act and SEC Rule10b-5 by not disclosing that they were paying
authors to promote the company’s stock. The
district court dismissed.

No Duty to Disclose That Defendants
Paid for the Articles’ Publication
On appeal, plaintiffs argued that defendants
had a duty to disclose that the company paid
the authors “because defendants provided
content for, edited, reviewed, and/or
approved those articles.” However, the court
concluded that “[b]ecause the complaint
does not adequately allege that defendants
had a duty to disclose that they paid for thearticles’ publication, plaintiffs fail to statea claim . . . .” Citing Janus Capital Groupv. First Derivative Traders, 564 U.S. 135(2011), the Second Circuit stated that “onlyan article’s maker, not its benefactor, hasa duty to disclose that it was paid for.” Thecourt went on to state that Janus madeit clear that neither the company nor the
executives qualified as a maker. In Janus,
the Supreme Court held that a mutual fundinvestment advisor could not be liable forPlaintiffs Failed to Allege
Defendants Had Ultimate Control
Over the Articles
The Second Circuit determined that plaintiffs
did not adequately allege that defendants had
ultimate control over the articles. The court
found that the complaint did not containsufficient factual allegations to support
the contention that “defendants furnishedinformation and language for, prepared,
reviewed, approved, and/or ratified thearticles . . . .” While statements from thecompany’s press releases were included in
the articles, the court observed that preparing
a press release that is repeated in a separate
article by a different author does not qualifythat press-release-preparer as the maker ofthe separate article’s statements. The court
stated that in Janus the Supreme Court“specifically rejected a holding that would
allow plaintiffs to sue a person who provides
the false or misleading information that
another person then puts into a statement.”
The Second Circuit further noted thatplaintiffs failed to adequately allege that the
CEO directly wrote the articles, controlled
what the authors put into the articles, or evensaw them before their publication.
3

The court pointed out that even in theevent that the CEO did provide some input
on the articles’ content, the complaint did
not support the conclusion that he was thearticles’ maker. The court found that thecomplaint did not sufficiently allege that:(i) the articles were published by anyone
except the authors; (ii) the authors lacked
final control over the content of the articles;(iii) the authors did not make the ultimate
decision as to what specific information
to include; or (iv) defendants and authors
collaborated to such an extent that defendants
controlled the articles’ publication.

Defendants Had a Duty to Disclosean Ongoing SEC Investigation to
Make Their Statements Completeand Accurate
Separately, the Second Circuit vacatedthe dismissal of plaintiffs’ claim that
defendants’ failure to disclose an ongoing SEC
investigation into the company’s accounting
controls was a material misrepresentation.
Drawing on the principle that once acompany speaks on an issue or topic, there
is a duty to tell the whole truth, the court
agreed with plaintiffs that defendants had
a duty to disclose the investigation because
by not mentioning it, their disclosures weremisleading. As defendants had specifically
noted the accounting control deficiencies,
stated that they were working on them, andlater stated that they had solved the issue, thecourt concluded that “the failure to disclose
the investigation would cause a reasonable
investor to make an overly optimistic
assessment of the risk.” Quoting Meyer
v. Jinkosolar Holdings, 761 F.3d 245 (2dCir. 2014).

Ninth Circuit: ForumSelection Clause Does Not
Contravene Strong Public
Policy Even Where It
Forecloses Ability to Bring
Section 14(a) Claims
On May 13, 2022, the Ninth Circuit affirmed
the dismissal of a shareholder derivative
action, which plaintiff had filed in a California
federal district court despite a forumselection clause in the company’s bylaws
designating the Delaware Court of Chancery
as the exclusive forum for derivative claims.
Lee v. Fisher, 34 F.4th 777 (9th Cir. 2022)(Smith, J.). The court held that plaintiff
had not carried her “heavy burden” toshow that the forum-selection clause was
unenforceable, as enforcement of the clause
would not contravene strong federal public
policy, despite this meaning that plaintiff’s
ability to bring a Section 14(a) claim would
be foreclosed because federal courts haveexclusive jurisdiction over these claims.

The Court Must Examine Whether
the Clause’s Enforcement Would
Contravene a Strong Public Policyof the Forum
Plaintiff brought claims alleging that thecompany and its directors had made false
statements in its proxy statements inviolation of Section 14(a) of the Exchange Act.
Plaintiff argued that the company’s forumselection clause violated public policy andwas unenforceable because it designated astate court as the exclusive forum. Under
Section 78aa of the Exchange Act, only federal
district courts may adjudicate Section 14(a)claims.3 Thus, the company’s forum-selection
clause prevented plaintiff from bringing aderivative Section 14(a) claim in any court.
On the issue of the clause’s enforcement,
the court explained that in Atlantic Marine
Construction v. U.S. District Court, 571 U.S.
49 (2013), the Supreme Court established therule that “a district court should transfer thecase [and thereby enforce the forum-selection
clause] unless extraordinary circumstances
3. Section 78aa states in relevant part: “[t]he district courtsof the United States . . . shall have exclusive jurisdiction ofviolations of this chapter.” This section further provides that“[a]ny suit or action . . . may be brought in any such district orin the district wherein the defendant is found.”4

unrelated to the convenience of the parties
clearly disfavor a transfer.” To define thephrase “extraordinary circumstances,” theNinth Circuit looked to M/S Bremen v.
Zapata Off-Shore, 407 U.S. 1 (1972)4 andfocused on its second factor: whether theclause’s enforcement would contravene strong
public policy. To determine whether a forumselection clause contravenes public policy,
the Ninth Circuit first looks to “the forum inwhich suit is brought” and then “determine[s]whether the plaintiff has identified a statuteor judicial decision in that forum that clearlystates strong public policy rendering theclause unenforceable.”

The Federal Policy in Favor of
Enforcing Forum-Selection Clauses
Supersedes the Exchange Act’s
Antiwaiver Provisions
Plaintiff argued that the Exchange Act’s
antiwaiver provision in Section 78cc(a), wasproof of strong public policy rendering theclause unenforceable. However, the court
disagreed, stating that “the strong federal
policy in favor of enforcing forum-selection
clauses supersedes antiwaiver provisions instate statutes as well as federal statutes . . . .”Quoting Sun v. Advanced China Healthcare,
901 F.3d 1081 (9th Cir. 2018). The court
further pointed out that the Exchange Act’s
antiwaiver provision does not contain a clear
declaration of federal policy because it does
not explicitly state that any waiver is void asagainst public policy.
Plaintiff claimed the clause should be
unenforceable based on Seafarers Pension
Plan v. Bradway, 23 F.4th 714 (7th Cir.
2022), which held that Section 115 of
the Delaware General Corporation Law
prohibited an identical forum-selection clausefrom entirely foreclosing plaintiff’s derivative
action under Section 14(a) and held that the
bylaw violated the Exchange Act’s antiwaiver
provision. However, the court stated thatplaintiff had waived reliance on Section 115
and, citing Advanced China Healthcare, thecourt explained that “[m]oreover, for thereasons previously discussed, our binding
precedent forecloses reliance on the Exchange
Act’s antiwaiver provision.”

Enforcement Does Not Violate Any
Express Statutory Policy of the
Exchange Act’s Exclusive Federal
Jurisdiction Provision
The court also found that the Exchange Act’s
exclusive federal jurisdiction provision,
15 U.S.C. § 78aa, does not provide a clear
statutory declaration and instead merely
forbids non-federal courts from adjudicating
Section 14(a) claims. The court pointed outthat the company’s bylaws did not force theDelaware Court of Chancery to adjudicate
the derivative claim and would only result in
the claim being dismissed in federal court.
Therefore, the court concluded, “enforcementof the forum-selection clause does not violate
any express statutory policy of the Exchange
Act’s exclusive federal jurisdiction provision.”

Federal Courts’ Obligation to Hear
Cases Is Overcome by the Strong
Presumption in Favor of Enforcing
Forum-Selection Clauses
As to plaintiff’s argument that federal
courts are obliged to hear cases within their
exclusive jurisdiction, the court determinedthat “this obligation is overcome by the strong
presumption in favor of enforcing forumselection clauses ‘regardless [of] whether theclause points to a state court, a foreign court,
or another federal court.’” Quoting Sun v.
Advanced China Healthcare, 901 F.3d 1081
(9th Cir. 2018).

4. Under M/S Bremen, the three principles that establish
extraordinary circumstances, are: (1) when the forumselection clause is invalid because of fraud or overreaching,(2) when enforcement of the clause would contravene a strong
public policy of the forum in which suit is brought, whether
declared by statute or by judicial decision, or (3) when theforum would be so gravely difficult and inconvenient thatplaintiff will for all practical purposes be deprived of his or her
day in court.
5SLUSA Was Intended to Prevent
Plaintiffs From Using State Law
Claims to Circumvent the PSLRA

Eleventh Circuit: SLUSA Held
to Bar Class Action for Breachof Fiduciary Duty Claims
Brought Under State Law
On May 31, 2022, the Eleventh Circuit
affirmed the dismissal of a putative classaction against a brokerage firm/investment
adviser alleging that, under Georgia law, thebrokerage firm breached its fiduciary duties
by recommending certain investments toclients. Cochran v. Penn Mut. Life Ins., 2022
WL 1744239 (11th Cir. 2022) (Carnes, J.).
The court held that the Securities Litigation
Uniform Standards Act (“SLUSA”) barred
plaintiff from using a class action to bring his
state law claims because the claims involved
allegations of misrepresentation or omissionthat should have been brought under thefederal securities laws. Referencing 15 U.S.C.
Section 77p(b), the court concluded that theclass action had been properly dismissed
because the complaint alleged “an untrue
statement or omission of material fact inconnection with the purchase or sale of acovered security.”

Background and Procedural History
Plaintiff alleged that the brokeragefirm breached its fiduciary duties byrecommending variable annuities to clientswith individual retirement accounts, causing
them to pay high fees without getting an extra
tax benefit because the individual retirement
accounts were already tax advantaged. The
brokerage firm moved to dismiss, arguing thatthe use of a class action was barred by federallaw. The district court granted the motion,agreeing that federal law barred the classaction.

The court noted that SLUSA was a responseto plaintiff attempts to circumvent the Private
Securities Litigation Reform Act (whichheightened pleading requirements for classactions alleging fraud in the sale or purchaseof securities) by basing their securities fraudclass action claims on state law, rather thanfederal law. SLUSA limits class actions bystating, “[n]o covered class action based upon
the statutory or common law of any Stateor subdivision thereof may be maintainedin any State or Federal court by any private
party alleging—(1) an untrue statement oromission of a material fact in connection withthe purchase or sale of a covered security;or (2) that the defendant used or employed
any manipulative or deceptive device orcontrivance in connection with the purchaseor sale of a covered security.” 15 U.S.C. § 77p(b).

To Determine if a Misrepresentation
or Omission Is Alleged, the Court
Looks to the Gravamen or Essenceof the Complaint
Citing Behlen v. Merrill Lynch, 311 F.3d
1087 (11th Cir. 2002), the court explainedthat “SLUSA’s bar applies when (1) the suitis a covered class action, (2) the plaintiffs’
claims are based on state law, (3) one ormore covered securities has been purchased
or sold, and (4) the defendant allegedly
misrepresented or omitted a material factin connection with the purchase or sale ofsuch security.” The court stated that the only
issue in the case was whether the complaint
alleged a misrepresentation or omission,
stating that if it does so, then it is barred.
The court explained that under Behlen, “[t]odetermine whether a complaint alleges amisrepresentation or omission, we look to
its gravamen or the essence of it.” The court
further explained that a court should focus“on the substance of the complaint, not on thelabels the plaintiff chooses to give his claims,
and not on the artful way a plaintiff words his
allegations.”
The court determined that the essenceof the complaint was that the brokerage
firm, through its investment advice andrecommendations, “affirmatively made false
statements, or failed to disclose material facts,6about the suitability of the variable annuity
investment for the type of account plaintiff
had, and in that way made misrepresentations
to the plaintiff.” The court observed that if thebrokerage firm’s recommendations had fully
disclosed all material facts, including that avariable annuity would not have tax benefits
and would be an unsuitable investment, thatplaintiff would have no cause of action. While
plaintiff argued the conflict of interest related
to the brokerage firm recommending variableannuities to generate larger fees was enoughto establish his breach of fiduciary duty claim,
the court explained that alleging a conflict ofinterest alone was not enough under Georgia
law and that instead plaintiff must allege
both a conflict of interest and a material
misrepresentation or omission. Thus,
plaintiff’s claim was necessarily premisedon an allegation of a misrepresentation oromission and was barred by SLUSA.

This edition of the
Securities Law Alert was edited by
Lynn K. Neuner / +1-212-455-2696
lneuner@stblaw.com
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com andKaren Porter / +1-202-636-5539
karen.porter@stblaw.com

7

New York

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Martin S. Bell+1-212-455-2542
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Washington, D.C.
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