Securities Law Alert
In This Edition:• Ninth Circuit: FOIA Information Can Count as Corrective Disclosure• Northern District of California: Lack of Allegations Regarding Motive Do Not Defeat anInference of Scienter• District of Delaware: No Obligation to Disclose Outside Counsel Legal Opinion When Other
Public Filings Sufficiently Disclose Risk
• Delaware Chancery Court: Applies Rales as General Demand Futility Test Largely Sidelining
AronsonNovember 2020

Ninth Circuit: FOIA
Information Can Count as
Corrective Disclosure

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On November 3, 2020, the Ninth Circuit
revived a securities fraud class action
alleging that BofI Holding, Inc. and certain
executives falsely denied that BofI was underinvestigation by the SEC. Grigsby v. BofI
Holding, Inc., 2020 WL 6438912 (9th Cir.
2020) (Christen, J.). The Ninth Circuit ruledthat the publication of information obtained
through a Freedom of Information Act(“FOIA”) request can count as a corrective
disclosure for loss causation pleading
purposes. The court also reversed “the district
court’s loss causation ruling to the extent it
deemed information obtained via a FOIA
request to be publicly available prior to its
disclosure.”

Background
In May 2015, the SEC opened an informal
inquiry into BofI and began a formal
investigation in February 2016, for which it
issued two subpoenas to BofI. Subsequently,“[i]n March 2017, the New York Post
Simpson Thacher & Bartlett LLP

reported that the Department of Justice, withinvolvement from the SEC, was investigating
BofI for possible money laundering.”
The same day, BofI issued a press releasedenying knowledge of “such purported
money laundering investigation.” Then “onOctober 25, 2017, the Post published anarticle titled Bank of Internet was under
16-month SEC investigation.” Plaintiffs allege
that this October 25, 2017 New York Post
article “revealed that BofI’s earlier denial of
any knowledge of an SEC investigation was
false.” The October 25, 2017 Post article wasbased on information obtained through a
FOIA request.
The district court dismissed plaintiffs’
complaint, concluding that “plaintiffs failed toadequately allege loss causation.” The district
court determined that the October 25, 2017
Post article “did not reveal new information to
the market, and thus could not be a corrective
disclosure of any misrepresentation.”
Additionally, “the court decided as a matterof law that the information obtained pursuant
to the FOIA request was publicly available
prior to its disclosure.” Plaintiffs appealed the
district court’s decision.

Ninth Circuit Addresses Whether
Information Obtained Through a
FOIA Request Can Be Corrective
The court started by stating that “[t]hedisputed element in this appeal is losscausation.” Refining the issue, the court statedthat “[t]his appeal requires us to consider
the discrete question whether information
obtained through a FOIA request can becorrective of an allegedly false and misleadingstatement by revealing nonpublic information
to the market.”With respect to defendants’ argument infavor of treating information that might havebeen discoverable through a FOIA request as
information that was already public, the court
pointed out two flaws. “First, informationmust be requested before it can be received
through the FOIA.” The court continued,“[s]econd, information must be produced
before it is publicly available, and not all
FOIA requests yield disclosure of the soughtafter information.” The court cautioned that“[g]iven FOIA’s general framework, the factthat a market actor lodges a FOIA request on
a given date does not allow the conclusionthat the information became publicly
available on that date because FOIA requests
do not always result in disclosures—andeven when they do, the disclosures are notinstantaneous.”
The court explained that “[a]t a minimum,
there must be some indication that therelevant information was requested andproduced before the information contained ina FOIA response can be considered publicly
available for purposes of loss causation.”
The court then held that “the district court
erred by concluding as a matter of law thatan article containing information obtained
through the FOIA could not qualify asa corrective disclosure for purposes of
establishing loss causation.”

Ninth Circuit Considers Whether
Plaintiffs Relying on FOIA
Information Face a Heightened
Pleading Burden
The court then considered “whether
information contained in the FOIA
response . . . had been publicly disclosed
prior to the October 25, 2017 Post article.”
Citing Loos v. Immersion Corp., 762 F.3d
880 (9th Cir. 2014),1 the court set forth thestandard stating that “[p]laintiffs’ burden
is to plausibly allege that the decline in the
defendant’s stock price was proximately
caused by a revelation of fraudulent activity,
rather than other factors.” The court clarified
that “[p]laintiffs’ burden is to describe how
the falsity of the defendant’s misstatement
was revealed to the market, not to describe
all the ways in which it was not revealed.”
The court held that “plaintiffs relying on
corrective disclosures that are in turn basedon information obtained through the FOIA
do not face a special pleading burden for
purposes of alleging § 10(b) loss causation.”
The court pointed out that “by effectively
requiring plaintiffs to show that no one else
had obtained the same information throughthe FOIA before the October 25, 2017 Post
article, the court elevated plaintiffs’ pleading
burden.” The court stated that it was sufficientfor the operative complaint to have “allegedthat the Post article disclosed BofI had been
the subject of a formal SEC investigation, thatthe article revealed the falsity of BofI’s priorstatement, and that the revelation caused
BofI’s stock price to drop.”

Northern District ofCalifornia: Lack of Allegations
Regarding Motive Do Not
Defeat an Inference of
Scienter
On November 4, 2020, the Northern Districtof California denied in part a motion todismiss securities fraud claims against Apple
Inc. and certain of its executives determiningthat scienter was sufficiently alleged withrespect to a statement by Apple CEO Tim
Cook on Apple’s business outlook in China.
In re Apple Inc. Sec. Litig., 2020 WL 6482014(N.D. Cal. 2020) (Rogers, J.). The court found
1. Please click here to read our prior discussion of the Ninth
Circuit’s decision in Loos.
2that plaintiff’s lack of allegations regarding
motive do not defeat an inference of scienter
under a holistic analysis at the motion todismiss stage.

Background
On November 1, 2018, Apple held aconference call with analysts and investors.
In response to a question about emerging
markets, Cook discussed “[t]he emerging
markets that we’re seeing pressure in aremarkets like Turkey, India, Brazil, Russia,
these are markets where currencies have
weakened over the recent period.” Cook
went on to state that “[i]n relation to China
specifically, I would not put China in thatcategory.” On January 2, 2019, Cook sent a
letter to investors announcing that “Apple
will miss its earnings guidance by up to$9 billion.” The letter noted that “China’s
economy began to slow in the second halfof 2018” and “[t]his economic decelerationaccounted for most of our revenue shortfall.”Apple’s stock price subsequently declined
from $157.92 to $142.19 per share. Plaintiff
alleged that Cook’s statement (that he would
not put China in the category of decelerating
emerging markets) was false or misleadingin light of his later admissions that Apple’s
China business was experiencing pressure at
the time. Defendants argued that plaintiff’s
scienter allegations were insufficient as amatter of law.

The Court Must Examine
Competing Inferences to
Determine Scienter
Discussing the standard for pleading scienter
under the Private Securities Litigation
Reform Act, the court explained that “courts
must engage in comparative evaluation byconsidering not only inferences urged by
the plaintiff but also competing inferences
rationally drawn from the facts alleged.” Thecourt continued that “[t]hus, an inference of
scienter is only strong if it is cogent and at
least as compelling as any opposing inferenceof non-fraudulent intent.” The court statedthat “[i]n making this evaluation, the court
accepts all factual allegations in the complaint
as true, considers the allegations holistically,
and takes into account plausible opposing
inferences.” Further, the court stated that“[i]n the Ninth Circuit, scienter covers not
only intent to deceive, manipulate, or defraud,
but also deliberate recklessness.”

A Lack of Allegations Regarding
Motive Do Not Defeat anInference of Scienter Under aHolistic Analysis
Examining the competing inferences, thecourt stated that “[d]efendants argue thatplaintiff’s theory of fraud does not make sense
because defendants did not profit from thealleged fraud but, on the contrary, engaged
in a $1 billion stock repurchase at supposedly
inflated prices.” Defendants compared thecurrent case to Nguyen v. Endologix, Inc.,
962 F.3d 405 (9th Cir. 2020), “where theNinth Circuit rejected a theory of fraud that it
found does not make a whole lot of sense.” In
Nguyen, the court dismissed the allegations,“that defendant knew that the FDA would
not approve the device based on the same
intractable issues that prevented approvalin Europe, but misrepresented the state ofaffairs[,]” as implausible. The Nguyen court
found that “the scienter allegation does notresonate in common experience because it
depends on the supposition that defendants
would rather keep the stock price high fora time and then face the inevitable fallout
once the unsolvable problem was revealed.”
In this case, the court noted “that Nguyen
presents an unusual case because both theSupreme Court and the Ninth Circuit havefound scienter on fairly similar allegations.”
Discussing the applicable precedent on theissue of scienter, the court stated that “[n]oneof these cases involved an obvious motive forfraud. On the contrary, these courts expressly
held that allegations of motive are notrequired.” The court stated that it “does notinterpret Nguyen to require a specific theoryof defendants’ motives at the pleading stage.”
Instead, the court considered Nguyen on its
facts. The court explained that “[w]ithout
stronger allegations of contemporaneousfacts contradicting defendants’ statements,
the more plausible inference was that3

defendants made promising statements
about the timing of FDA approval based on
the initial results of the U.S. clinical trial, butthen modulated their optimism when the
results began to raise questions.” The court
here pointed out that “[t]hus, while lack ofobvious motive presented a challenge, thedeeper concern stemmed from lack of dataof contemporaneous falsity.” The court thus
found “that plaintiff’s lack of allegations
regarding motive do not defeat an inference of
scienter under a holistic analysis.” The court
acknowledged that “while several courts inthis District have found stock buy-backs toundermine scienter, the Court does not findthat dispositive.” The court explained that“cursory background knowledge suggests that[stock buy-backs] enrich shareholders, suchas Cook and Maestri, in a way that is entirely
consistent with scienter.”

District of Delaware: No
Obligation to Disclose Outside
Counsel Legal Opinion When
Public Filings Sufficiently
Disclosed Risk
On November 4, 2020, the District ofDelaware granted defendants’ motion todismiss all fraud-based claims arising out of
Uniti’s spinoff from Windstream Holdings,
Inc. into a real estate investment trust(“REIT”). SLF Holdings, LLC v. Uniti Fiber
Holdings, Inc., 2020 WL 6484310 (D. Del.
2020) (Stark, J.). The court held that plaintiff
failed to plead an actionable omission also
because defendants sufficiently disclosed
the risks regarding the spinoff and REITin their public filings, and defendants were
not obligated to disclose the specific risks
identified in the assessments of its accounting
firm and outside counsel.

Background
Uniti was created in 2015 when its former
parent, Windstream, spun it off into a REIT.
Windstream conveyed certain assets to thespinoff and Uniti entered into a master leasewith Windstream (the “Master Lease”) tolease those assets back to Windstream. An
accounting firm provided Windstream “withan independent appraisal of the useful life of
the assets being leased, which was a factor inconcluding that the Master Lease was a truelease, and was not financing.” Windstream
also engaged outside counsel and received
a legal opinion stating that “the IRS may
argue that the proposed lease is merely afinancing arrangement and that the purported
lessor [Uniti] is, in substance, a secured
creditor but holds no equity interest in theproperty.” Before and after the spinoff, Uniti
made public disclosures regarding Uniti’sbusiness, the Master Lease and spinoff. These
disclosures included that “Uniti’s successdepended significantly on the viability ofWindstream.”
In July 2017, plaintiff in this case soldits membership interests in a fiber optic
network provider to Uniti in exchange forcash and Uniti stock equivalents. Before thesale, “Uniti executives advertised the REIT
structure, the Master Lease, Windstream’s$650 million in annual rental payments, andthe iron-clad dividend that Uniti would be
able to pay.” However, neither the accounting
firm’s analysis nor the outside counsel’s legal
opinion were disclosed to plaintiff during
the negotiations. In 2019, Windstream filed
for bankruptcy. Subsequently, plaintiff filed
the instant action alleging “a complex andmultifaceted financial fraud arising out of
Uniti’s spinoff[.]”No Need to Disclose Legal Opinion
Identifying Specific Risks if Public
Filings Are Sufficient
Plaintiff claimed that “the generalstatements that Uniti would be dependent
on [Windstream] to make payments under
the Master Lease and events could materiallyand adversely affect Uniti’s business were
allegedly misleading because they failed todisclose the full spectrum of risk, including
those identified by [the accounting firm andoutside counsel].” However, the court statedthat plaintiff “has failed to plead an actionableomission also because Defendants sufficiently
4disclosed the risks regarding the spinoff
and REIT in their public filings.” The court
pointed out that “[t]he spinoff documents,
the Master Lease, the indentures, andWindstream’s statements to regulators were
all publicly available.”

fared well in the face of subsequent judicial
developments.” Whereas, “[t]he Rales test, bycontrast, has proved to be broad and flexible,
and it encompasses the Aronson test as a
special case.”

The court explained that “[t]he information
disclosed in these materials identified
the risks pertaining to the Master Lease,including that it could be recharacterized as
something other than a true lease.” Further,“[i]t also disclosed that Uniti’s copper wiring
had a useful life of 7-40 years.” The court
stated that “[t]hese disclosures put Uniti’sshareholders and [plaintiff] on notice thatthe useful life of the copper assets could beshorter than the 15-year term of the Master
Lease.” The court held that “[h]aving madethese public disclosures, which [plaintiff]
admits it reviewed, Defendants were notobligated to disclose the specific risks
identified in the assessments of [theaccounting firm and outside counsel].”The Court Points Out theLimitations of Aronson

Delaware Chancery Court:
Applies Rales as General
Demand Futility Test Largely
Sidelining Aronson
On October 26, 2020, the Delaware Chancery
Court dismissed a derivative action, related
to an abandoned stock reclassification plan,
against current and former directors ofFacebook because plaintiff did not makea pre-suit demand and failed to establish
demand futility. United Food & Com. Workers
Union & Participating Food Indus. Emps.
Tri-State Pension Fund v. Zuckerberg, 2020
WL 6266162 (Del. Ch. 2020) (Laster, V.C.).
The court held that it would apply Rales v.
Blasband, 634 A.2d 927 (Del. 1993) as thegeneral demand futility test.

The Court Weighs the Two Demand
Futility Tests Against Each Other
The court began its analysis by comparing
the two demand futility tests the Delaware
Supreme Court has established which arefound in Rales and in Aronson v. Lewis,
473 A.2d 805 (Del. 1984). The court observedthat “the Aronson test has proved to becomparatively narrow and inflexible in its
application, and its formulation has not

Pointing out the weakness of Aronson as
applied to the facts in this case, the court
stated that “Aronson does not provide
guidance about what to do with either the
director who abstained [from the vote on
the reclassification] or the two directors whojoined the Board later.” The court continued
that “[t]he director who abstained fromvoting on the Reclassification suffers fromother conflicts that renders her incapable ofconsidering a demand, yet a strict readingof Aronson only focuses on the challenged
decision and therefore would not account for
those conflicts.” Further, the court pointed
out that “the plaintiff alleges that one of thedirectors who subsequently joined the Board
has conflicts that render him incapable ofconsidering a demand, but a strict reading ofAronson would not account for that either.”

The Court Applies Rales as General
Demand Futility Test
The court concluded that “[p]recedent thus
calls for applying Aronson, but its analyticalframework is not up to the task. The Rales
test, by contrast, can accommodate allof these considerations.” The court thenannounced that “[t]his decision therefore
applies Rales as the general demand futility
test.” The court explained that it would
draw “upon Aronson-like principles whenevaluating whether particular directors face asubstantial likelihood of liability as a result of
having participated in the decision to approve
the Reclassification.”
5

The court stated that it would proceed “ona director-by-director basis, asking for eachdirector (i) whether the director received amaterial personal benefit from the alleged
misconduct that is the subject of the litigation
demand, (ii) whether the director would facea substantial likelihood of liability on any of
the claims that are the subject of the litigation
demand, and (iii) whether the director lacks
independence from someone who received
a material personal benefit from the alleged
misconduct that is the subject of the litigation
demand or who would face a substantial

likelihood of liability on any of the claims thatare the subject of the litigation demand.”
Reviewing the facts concerning the directors
who were on the board when the complaint
was filed, the court considered whether theyvalidly could consider a litigation demand.
Finding a majority would be disinterested,
independent, and capable of considering alitigation demand, the court held that demand
was not excused and granted defendants’
motion to dismiss.

This edition of the
Securities Law Alert was edited by
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
Cheryl J. Scarboro
cscarboro@stblaw.com / +1-202-636-5529,
and George S. Wang
gwang@stblaw.com / +1-212-455-2228

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