Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Determine Whether SEC Administrative Law Judges Are “Officers of
the United States” Within the Meaning of the Appointments Clause• Second Circuit: (1) Defendants Do Not Have to Conclusively Prove a Complete Absence of Price Impact
to Rebut the Basic Presumption, and (2) Courts Must Consider Price Impact Evidence at the Class
Certification Stage• Sixth Circuit: Allegations in a Third-Party Complaint, Coupled with an Admission of One of Those
Allegations, May Constitute Corrective Disclosures for Loss Causation Purposes• Central District of California: Allegations That a Company Revised a Statement of Opinion, Standing
Alone, Are Insufficient to Plead a Securities Fraud Claim• Delaware Supreme Court: Chancery Court Abused Its Discretion in Placing No Weight on the Deal Price ina Transaction Resulting From a Robust Sales Process• Delaware Supreme Court: Reaffirms the High Standard for Pleading Demand Futility Based on an Alleged
Caremark Violation
January 2018

“Simpson Thacher& Bartlett enjoys goldstandard status in a broadand varied spectrum ofpractice areas including …
securities” litigation.

–Benchmark Litigation
2017

Simpson Thacher & Bartlett LLPSupreme Court: Grants
Certiorari to Determine
Whether SEC Administrative
Law Judges Are “Officers of
the United States” Within the
Meaning of the Appointments
ClauseOn January 12, 2018, the Supreme Court
granted certiorari to resolve a circuit split on
the question of whether the administrative
law judges (“ALJs”) for the SEC’s in-housecourts are “Officers of the United States”
within the meaning of the Appointments
Clause of the United States Constitution.
Lucia v. SEC, No. 17-130. The Appointments
Clause states that the President “shallnominate, and by and with the Advice andConsent of the Senate, shall appoint …
Officers of the United States.” U.S. Const.
art. II, § 2, cl. 2. The Appointments Clausefurther provides that “Congress may by Law
vest the Appointment of such inferior Officers,
as they think proper, in the President alone,in the Courts of Law, or in the Heads ofDepartments.”
In Raymond J. Lucia Cos. v. SEC, 832
F.3d 277 (D.C. Cir. 2016) (Rogers, J.),
the D.C. Circuit concluded that the SEC’s
ALJs are not “Officers of the United States”
within the meaning of the Appointments
Clause. The court held that the key inquiry
for determining the applicability of the
Appointments Clause is whether the SEC
ALJs “issue final decisions” of the SEC. The
D.C. Circuit found it significant that the SEC

has a discretionary right to review the actionof any ALJ as it sees fit, either on its own
initiative or upon a petition for review filed
by a party or aggrieved person. Id. (citing
15 U.S.C. § 78d-1(a)-(b)). The SEC has theauthority to “review[ ] an ALJ’s decision
de novo” and “may make any findings or
conclusions that in its judgment are properand on the basis of the record.” Id. (citing
17 C.F.R. § 201.411(a)). In the event that “noreview of the initial decision is sought orordered,” the SEC will issue an order statingthat it has declined review and specifying thedate that the ALJ’s sanctions, if any, will takeeffect. The ALJ’s initial decision becomes final
only upon issuance of the SEC’s order.
The D.C. Circuit noted that the SEC “retain[s]full decision-making powers” over cases
heard by the ALJs. The court observed that
the SEC’s ALJs “neither have been delegatedsovereign authority to act independently of
the [SEC] nor, by other means establishedby Congress, do they have the power to bind
third parties, or the government itself, for the
public benefit.”
In Bandimere v. SEC, 844 F.3d 1168 (10thCir. 2016) (Matheson, J.), the Tenth Circuit
rejected final decision-making power as
the key criterion for assessing whether the
Appointments Clause applies. The Tenth
Circuit relied on the Supreme Court’s decisionin Freytag v. Commissioner of Internal
Revenue, 501 U.S. 868 (1991) to hold that
the SEC’s ALJs are “inferior officers” whomust be appointed in conformity with the
Appointments Clause.
The Freytag Court found that the special trial
judges (“STJs”) of the federal Tax Court were
“inferior officers” within the meaning of the
Appointments Clause because (1) the position
of STJ was “established by Law”; (2) “theduties, salary, and means of appointment” of
STJs were “specified by statute”; and (3) STJs
“perform more than ministerial tasks” and“exercise significant discretion” in “carryingout [their] important functions.” Bandimere,
844 F.3d 1168 (quoting Freytag, 501 U.S.
868).
The Tenth Circuit found that these three
Freytag factors apply equally to SEC ALJs.
The court determined that “SEC ALJs exercise
significant discretion in performing importantfunctions commensurate with the STJs’
functions described in Freytag.” The court
noted, for example, that SEC ALJs have the“authority to shape the administrative recordby taking testimony, regulating document
production and depositions, ruling on theadmissibility of evidence, … and presiding
over trial-like hearings,” among other
responsibilities.
In so holding, the Tenth Circuit expressly
disagreed with the D.C. Circuit’s decision in
Lucia. While the Tenth Circuit acknowledgedthat “[f]inal decision-making authority isrelevant in determining whether a public
servant exercises significant authority,” thecourt found that not “every inferior officer
must possess final decision-making power.”
The Supreme Court will hear the case later
this year. A date for oral argument has not yet
been set.

Second Circuit: (1) Defendants
Do Not Have to Conclusively
Prove a Complete Absenceof Price Impact to Rebut
the Basic Presumption, and(2) Courts Must Consider
Price Impact Evidence at theClass Certification StageOn January 12, 2018, the Second Circuit
vacated class certification in a securities fraud
action in which defendants attempted to rebut
the Basic presumption with price impact
evidence.1 Arkansas Teachers Ret. Sys. v.
Goldman Sachs Grp., 2018 WL 385215 (2dCir. 2018) (Wesley, J.) (Arkansas Teachers
II). The Second Circuit found the district
court may have imposed a higher burden
than the “preponderance of the evidence”
standard it recently adopted in Waggonerv. Barclays, 875 F.3d 79 (2d Cir. 2017).2
The Second Circuit further ruled that the
district court “erred in declining to consider”
defendants’ price impact evidence at the classcertification stage.

1. The Supreme Court has stated that “[a]ny showing that severs
the link between the alleged misrepresentation and … the pricereceived (or paid) by the plaintiff … will be sufficient to rebut thepresumption of reliance.” Basic v. Levinson, 485 U.S. 224 (1988).
2. Please click here to read our prior discussion of the Second
Circuit’s decision in Waggoner.
2

Courts Must Consider Price
Impact Evidence at the Class
Certification StageTo Rebut the Basic Presumption
at the Class Certification Stage,
Defendants Must Only Demonstratea Lack of Price Impact by aPreponderance of the Evidence
In the decision below, the district court
found defendants’ proffered evidence of
price impact insufficient to rebut the Basicpresumption because defendants did “notprovide conclusive evidence that no link
exists between the price decline and themisrepresentation.” In re Goldman Sachs
Grp. Sec. Litig., 2015 WL 5613150 (S.D.N.Y.
2015) (Arkansas Teachers I). Defendants
argued on appeal that the district court“imposed an impermissibly high evidentiary
burden by requiring them to rebut the Basicpresumption with conclusive proof of a lackof price impact.” Arkansas Teachers II, 2018
WL 385215.
After the district court issued its decision,
the Second Circuit in Waggoner held that
defendants must “do more than merely
produce evidence that might result in afavorable outcome.” Waggoner, 875 F.3d 79.
The Waggoner court ruled that “defendants
seeking to rebut the Basic presumption
must demonstrate a lack of price impact by
a preponderance of the evidence at the classcertification stage rather than merely meet aburden of production.”
In Arkansas Teachers II, the Second
Circuit found it “unclear …whether the[district] court required more of defendants
than a preponderance of the evidence.” 2018
WL 385215. The Second Circuit therefore
vacated the district court’s decision andremanded for the court “to reconsider
defendants’ evidence in light of the[Waggoner] standard.”

During the class certification proceedings,
defendants produced evidence that there
was no decline in the price of the company’s
stock on more than thirty dates when news
sources reported the company’s alleged
conflicts of interest in the transactions at
issue. The Second Circuit found the district
court erroneously “construed this evidenceas ‘an inappropriate truth on the market
defense’ or as evidence of the statements’lack of materiality, neither of which thecourt thought it could consider at the classcertification stage.” Id. (quoting Arkansas
Teachers I, 2015 WL 5613150). The district
court did not hold an evidentiary hearing or
an oral argument to address defendants’ priceimpact evidence.
On appeal, the Second Circuit explainedthat “[t]he ‘truth on the market’ defense
attacks the timing of the plaintiffs’ purchaseof shares” on the theory that “the market
was already aware of the truth regarding
defendants’ misrepresentations at thetime the class members purchased theirshares.” Here, it was “undisputed thatplaintiffs purchased their shares after the
misstatements were made but before thetruth was revealed.” The Second Circuit foundthat “defendants did not present a ‘truth on
the market’ defense” but instead presented
evidence that alleged “conflicts of interest ‘did
not actually affect the stock’s market price.’”Id. (quoting Halliburton Co. v. Erica P. John
Fund, 134 S. Ct. 2398 (2014)).
The Second Circuit also distinguishedprice impact from materiality. The court
observed that while “price impact touches
on materiality, which is not an appropriate
consideration at the class certification
stage, it ‘differs from materiality in a crucial
respect.’” Id. (quoting Halliburton, 134 S. Ct.
2398). The court explained that “[w]hether
a misrepresentation was reflected in themarket price at the time of the transaction—
whether it had price impact—‘is Basic’s
fundamental premise. It … has everything
to do with the issue of predominance at
the class certification stage.’” Id. (quoting
Halliburton, 134 S. Ct. 2398). The Second
Circuit emphasized that if an alleged
misrepresentation did not affect the stock
price, there would be no basis for plaintiffs

3

to assert that they indirectly relied on thatmisrepresentation through the market price.
The Second Circuit instructed the district
court to consider defendants’ price impact
evidence on remand, and “encourage[d] thecourt to hold any evidentiary hearing or oral
argument it deems appropriate under thecircumstances.”

Sixth Circuit: Allegations ina Third-Party Complaint,
Coupled with an Admissionof One of Those Allegations,
May Constitute Corrective
Disclosures for Loss Causation
Purposes
On December 13, 2017, the Sixth Circuit
rejected a “categorical” rule that allegations
in a third-party complaint cannot constitutecorrective disclosures for loss causation
purposes. Norfolk Community Ret. Sys. v.
Community Health Sys., 877 F.3d 687 (6thCir. 2017) (Kethledge, J.). Reversing the
district court’s decision, the Sixth Circuit
held that plaintiffs adequately pled losscausation based on the allegations in a thirdparty complaint, coupled with the CFO’s
admission of one of the central allegationsin the complaint. The court found that“these disclosures—and the speed at which[the company’s] share price fell after them—make it at least plausible that the disclosures
had something to do with [plaintiffs’] losses.”
The Sixth Circuit explained that therequirement for pleading loss causation is“‘not meant to impose a great burden upona plaintiff.’” Id. (quoting Dura Pharm. v.
Broudo, 544 U.S. 336 (2005)). “Rather it ismeant to prevent disappointed shareholders
from filing suit merely because their shares
have lost value and then using discovery
to determine whether the loss was due
to fraud.” That “at the pleading stage, aplaintiff need only ‘provide a defendant withsome indication of the loss and the causal
connection that the plaintiff has in mind.’” Id.
(quoting Dura, 544 U.S. 336).
The court observed that while “[s]ometimes
defendants reveal their own fraud via a‘corrective disclosure,’ … such admissions
can be hard to come by.” And corrective“revelations can come from many sources,
including whistleblowers, analysts, andnewspaper reports.” Moreover, “suchrevelations need not come all at once, but cancome in a series of partial disclosures.”In the case before it, defendants contended
that the third-party complaint “could notreveal the truth behind their prior alleged
misrepresentations because complaints canreveal only allegations rather than truth.”
The Sixth Circuit recognized that this“proposition might have merit as a generalrule,” but “reject[ed] it as a categorical one.”The court reasoned that “every representationof fact is in a sense an allegation, whether
made in a complaint, newspaper report,press release, or under oath in a courtroom.”
The court acknowledged that certain typesof representations “are more credible
than others,” and “[m]ere allegations in acomplaint tend to be less credible.” However,“these are differences of degree, not kind, andeven within each type of representation someare more credible than others.” The court
stated that it must therefore “evaluate eachputative disclosure individually (and in thecontext of any other disclosures) to determine
whether the market could have perceived it
as true.”

The Sixth Circuit found the third-party
complaint at issue was particularly credible
because the company’s CEO “promptly
admitted the truth of one of the complaint’s
core allegations.” The court noted that theallegations of loss causation were similar to
those in Lloyd v. CVB Financial Corp., 811
F.3d 1200 (9th Cir. 2016).3 There, the Ninth
Circuit found plaintiffs had adequately pledloss causation based on the announcementof an SEC investigation, together with the
3. Please click here to read our prior discussion of the Ninth
Circuit’s decision in Lloyd.
4company’s subsequent disclosure that it was
charging off the loans that were the subject ofthat investigation.
The Sixth Circuit also noted that the thirdparty complaint included expert analyses
describing the extent to which the company
allegedly inflated its revenues. The court
found that the experts’ conclusion concerning
the hospital’s inpatient admission practices“was beyond the ken of most investors, andthus revealed new information to them.”
The court concluded that plaintiffs “plausibly
alleged corrective disclosures that revealed
the defendants’ antecedent fraud to themarket and that thereby caused the plaintiffs’
economic loss.”

Central District of California:
Allegations That a Company
Revised a Statement of
Opinion, Standing Alone,
Are Insufficient to Plead a
Securities Fraud ClaimOn January 8, 2018, the Central Districtof California held that plaintiffs could notassert a securities fraud claim concerning apreliminary purchase price allocation (“PPA”)
for an acquisition merely through hindsightpleading that the company had subsequently
revised the PPA. M&M Hart Living Trust v.
Global Eagle Entertainment, 2018 WL ____­(C.D. Cal. 2018) (Anderson, J.).4
Following the acquisition in question, thecompany announced a delay to its annual
report and disclosed material weaknesses
in its internal controls. Plaintiffs’ initial
allegations were dismissed without leave toamend. After the company filed its annual
report, plaintiffs moved to amend thejudgment, and obtain leave to file an amended
complaint, on the grounds that the company’s
annual report disclosed, for the first time, arevised PPA for the acquisition.

demonstrated that the opinion was false when
made. The court rejected this contention, andheld that “later adjustments do not inherently
make the earlier statement false under
Rule 10(b).”The court explained that in order to state asecurities fraud claim based on an alleged
misstatement of opinion, plaintiffs mustsatisfy one of the three prongs of the test theNinth Circuit adopted in City of Dearborn
Heights Act 345 Police & Fire Retirement
System v. Align Technology, 856 F.3d 605(9th Cir. 2017).5 If a plaintiff “relies on atheory of material misrepresentation” under
the first prong, “the plaintiff must allege boththat the speaker did not hold the belief she
professed and that the belief is objectively
untrue.” City of Dearborn Heights, 856 F.3d
605. If the “plaintiff relies on a theory that astatement of fact contained within an opinion
statement is materially misleading” under thesecond prong of the test, the plaintiff “mustallege that the supporting fact the speakersupplied is untrue.” Finally, if the “plaintiff
relies on a theory of omission” under thethird prong, “the plaintiff must allege facts
going to the basis for the issuer’s opinion
whose omission makes the statement at issue
misleading to a reasonable person reading thestatement fairly and in context.”
Here, the court found plaintiffs “offer[ed] only
a post hoc assessment” that the preliminary
PPA was “‘grossly incorrect.’” The court held
these allegations “insufficient to allege falsity
under the Ninth Circuit’s standard.” M&M
Hart Living Trust, 2018 WL ____. The
court found plaintiffs did not “allege that the
preliminary PPA was not actually believed by[d]efendants or that [d]efendants were awareof undisclosed facts that tended to seriously
undermine the preliminary PPA’s accuracy at
the time the statement was made” as required
under the first prong of the City of Dearborn
Heights test.

Although plaintiffs conceded that the
preliminary PPA “constituted an opinion,”
plaintiffs argued that the preliminary PPA“was false because it was later revised” andclaimed that the extent of the revisions

The court further determined that plaintiffs
did not “identify facts going to the basis of thepreliminary PPA that rendered it misleading
to a reasonable person” under the second
prong of the City of Dearborn Heights
test. The court found it significant that thecompany had expressly cautioned investors
that the final PPA could be materiallydifferent from the preliminary PPA based on

4. Simpson Thacher represents Global Eagle Entertainment, Inc.
and the individual defendants in this matter.

5. Please click here to read our prior discussion of the Ninth
Circuit’s decision in City of Dearborn Heights.
5

several factors, some of which could not be“predicted with certainty.”
The court concluded that “[o]n these facts,[p]laintiffs cannot adequately allege thatthe preliminary PPA was false.” Based on its
finding that plaintiffs’ proffered new evidence
would not have “changed the outcome of thecase,” the court denied plaintiffs’ motion toamend the judgment and for leave to file anamended complaint.

Delaware Supreme Court:
Chancery Court Abused Its
Discretion in Placing No
Weight on the Deal Price in a
Transaction Resulting From a
Robust Sales Process
On December 14, 2017, the Delaware
Supreme Court reversed and remanded awidely-covered appraisal decision in which
the Chancery Court placed no weight on the$13.75 per share deal price, but instead reliedon its own discounted cash flow (“DCF”)
analysis to arrive at a fair value of $17.62 forDell (approximately 30% higher than the deal
price and 75% higher than the unaffected
stock price). Based on the record before it,
the Delaware Supreme Court found “thedeal price deserved heavy, if not dispositive,
weight.” Dell v. Magnetar Global Event
Driven Master Fund Ltd., 2017 WL 6375829(Del. 2017) (Dell II) (Valihura, J.).
In the decision below, the Chancery Court
acknowledged that the sales process (bothpre- and post-signing) was “praiseworthy.”In re Appraisal of Dell, 2016 WL 3186538(Del. Ch. May 31, 2016). However, it
identified multiple concerns which led it todisregard both the stock price and deal pricein calculating fair value. The Chancery Court
concluded that investor short-sightedness led
the company to be chronically undervalued
in the market despite Michael Dell’s longterm strategy to transform and reinvigorate
the company. The Chancery Court was also
critical of a pre-signing process of exclusively
private equity firms, and questioned whether
private equity buyers ever pay “fair value”
under the appraisal statute due to their use ofleveraged buyout (“LBO”) models targetinghigh internal rates of return (“IRR”). The
Chancery Court was finally skeptical that the

post-signing go-shop process helped establishthat Michael Dell and Silver Lake Partner’s
bid was at a market clearing price due tostructural concerns inherent in managementbuyout (“MBO”) transactions.
The Delaware Supreme Court found theChancery Court’s “decision to rely ‘exclusively’on its own DCF analysis [was] based on
several assumptions that [were] not grounded
in relevant, accepted financial principles.”Dell II, 2017 WL 6375829. First, the Delaware
Supreme Court determined that the record
reflected that the market for the company’s
securities was efficient (e.g., significant
analyst coverage, robust trading volume,
rapid price reactions to significant companynews).

Second, the Delaware Supreme Court again
reaffirmed (as it had in DFC Global Corp.
v. Muirfield Value Partners, 172 A.3d 346(Del. 2017)6) that there is no “private equity
carve out” in appraisal. Where there is anappropriate sales process, the Chancery Court
can defer to the merger price as the best
evidence of fair value, even if that processincluded only private equity bidders.
Third, the Delaware Supreme Court
concluded that the Chancery Court’s elevationof “theoretical” concerns about MBO go-shops
over the facts of the transaction, whichsuggested a fair and relatively open postsigning market check, was an error.
The Delaware Supreme Court was also criticalof the Chancery Court’s reasoning that its own
DCF analysis was superior to the stock market
consensus on Dell’s value and the agreed deal
price. The Delaware Supreme Court observedthat the $17.62 per share value derived from
6. Please click here to read our prior discussion of the Delaware
Supreme Court’s decision in DFC Global.
6the Chancery Court’s DCF analysis was a
price that, as reflected in the record, no realworld party (private equity bidder, strategic
bidder or public market investor) was willingto pay for Dell. The Delaware Supreme Court
found that the “Court of Chancery’s DCF
value was the antithesis of any economist’s
definition of fair market value” and wrote thatthe facts suggested “strong reliance upon thedeal price and far less weight, if any, on the
DCF analyses.”
The Delaware Supreme Court determinedthat there was “compelling” “evidence ofmarket efficiency, fair play, low barriers toentry, outreach to all logical buyers, and thechance for any topping bidder to have thesupport of [the CEO’s] own votes.” Under
these circumstances, the Delaware Supreme
Court found the Chancery Court’s decision toplace no weight on the market price “abuse[d]even the wide discretion afforded the Court ofChancery in these difficult cases.”
Although the Delaware Supreme Court did
not hold “that the market is always the bestindicator of value, or that it should always
be granted some weight,” its opinion—
particularly when read in conjunction with
its earlier guidance in DFC Global—signalsthat the Delaware Supreme Court believes
that greater deference should be given to thedeal price resulting from an appropriate saleprocess.
The Delaware Supreme Court instructed thaton remand, the Chancery Court may “enterjudgment at the deal price … with no further
proceedings.” If the Chancery Court instead“chooses to weigh a variety of factors inarriving at fair value,” the court must “explainthat weighting based on reasoning that is
consistent with the record and with relevant,accepted financial principles.”Delaware Supreme Court:
Reaffirms the High Standard
for Pleading Demand
Futility Based on an Alleged
Caremark Violation
On December 15, 2017, the Delaware Supreme
Court affirmed dismissal of a derivative suitagainst the directors of an energy company
for failure to plead demand futility basedon an alleged Caremark violation. City ofBirmingham Ret. & Relief Sys. v. Good, 2017
WL 6397490 (Del. 2017) (Seitz, J.). Plaintiffs
alleged that demand was excused because
the directors faced a substantial likelihoodof personal liability for failing to ensure thecompany’s compliance with environmental
regulations.7 The company ultimately faced
criminal consequences, along with hefty fines
and sizable remediation costs. The Delaware
Supreme Court reaffirmed that plaintiffs
cannot plead the bad faith necessary to statea Caremark violation merely by pointing to a“bad outcome.”
In In re Caremark International Derivative
Litigation, 698 A.2d 959 (Del. Ch. 1996),
the Delaware Chancery Court recognizedthat directors may face personal liability for
failure to ensure corporate compliance withthe law. Plaintiffs asserting a Caremark
claim “must allege that the directors
intentionally disregarded their oversight
responsibilities such that their dereliction of
fiduciary duty rose to the level of bad faith.”
City of Birmingham, 2017 WL 6397490.
Given “the difficulties in proving bad faith
director action,” the Delaware Supreme Court
reiterated that “a Caremark claim is ‘possibly
the most difficult theory in corporation law
upon which a plaintiff might hope to win
a judgment.’” Id. (quoting Caremark, 698
A.2d 959).

Plaintiffs Cannot Rely on a Bad
Outcome to Allege Bad Faith
In the case before the court, plaintiffs
alleged that certain board presentations andminutes demonstrated that the board knew
the company was flouting environmental
7. Plaintiffs may plead demand futility by alleging particularizedfacts that “create a reasonable doubt of the board’s independence
and disinterestedness when the demand would reveal board
inaction of a nature that would expose the board to ‘a substantial
likelihood’ of personal liability.” Horman v. Abney, 2017 WL
242571 (Del. Ch. 2017) (quoting Rales v. Blasband, 634 A.2d 927(Del. 1993)).
7

regulations, yet failed to take steps to ensurecompliance. The Delaware Supreme Court
determined that these presentations andminutes instead confirmed that “the board
was not only informed of environmental
problems, but also the steps being taken
to address them.” The court held thesematerials did “not lead to the inference
that the board consciously disregarded
its oversight responsibility by ignoring
environmental concerns.”
The Delaware Supreme Court found plaintiffs’
allegations similar to those at issue in Stone
v. Ritter, 911 A.2d 362 (Del. 2006). There,
plaintiffs asserted a Caremark violation
where the company had paid large fines forlegal violations, even though the board hadmonitored the company’s operations throughperiodic reports from the company’s officers.
The Stone court held that plaintiffs could notstate a Caremark claim by “equat[ing] a bad
outcome with bad faith.” Stone, 911 A.2d 362.
“As in Stone,” the Delaware Supreme Court inCity of Birmingham found that plaintiffs wereattempting to “conflate the bad outcome of
the criminal proceedings with the actions of
the board.”

Allegations of BusinessFriendliness Are Not Sufficient toAllege Regulator Corruption
Plaintiffs further claimed that the directors
had “improperly colluded with regulators to
avoid remediating environmental problems.”
The Delaware Supreme Court found plaintiffs
merely “alleged that [the regulator] in general
did not aggressively enforce environmental

laws.” The court explained that “general
allegations regarding a regulator’s businessfriendly policies are insufficient to lead to an
inference that the board knew [the company]
was colluding with a corrupt regulator.”
Rather, plaintiffs must “allege in sufficientdetail that [the company] illegally colluded
with a corrupt regulator,” and then “tie theimproper conduct to an intentional oversight
failure by the board,” to allege a Caremark
violation on this basis.

Chief Justice Strine, Dissenting,States That “Conclusive Proof”
Is Not Necessary to Allege a
Caremark Claim
Chief Justice Strine, dissenting, expressed hisview that plaintiffs need not “have conclusive
proof of all their contentions” to meet theparticularized pleading requirement for
demand futility. He observed that “[r]arely
will [the] evidence involve admissions by
experienced managers and board advisorsthat the strategy they are undertaking
involves a conscious decision to violate
the laws.” Chief Justice Strine opined thatplaintiffs do not “have to prove at this stage
that there was collusion between a weak
local regulator” and the company to state a
Caremark violation. Rather, plaintiffs only
have to “plead facts supporting an inference
that [the company] consciously was violating
the law, taking steps that it knew were notsufficient to come into good faith compliance,
but which it believed would be given a
blessing by a [business-friendly] regulatory
agency.”This edition of the
Securities Law Alert was edited by
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

8

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Los Angeles

Paul C. Curnin+1-212-455-2519
pcurnin@stblaw.com

Michael J. Osnato, Jr.
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Michael D. Kibler+1-310-407-7515
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Nicholas S. Goldin+1-212-455-3685
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david.elbaum@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com
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Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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