Securities Law Alert
In This Edition:• Second Circuit: “Tentative and Generic” Compliance-Related Statements Are Not Actionable Securities
Fraud• Eighth Circuit: Omitting Projected Net Income/Loss Information May Render a Proxy Statement
Materially Misleading in Violation of Section 14(a) and Rule 14a-9• Southern District of New York: Duty to Disclose Under Item 303 of Regulation S-K Is Limited to “KnownRisks” With a “Fairly Substantial Probability” of Having a “Material Impact”• District of Minnesota: Summary Judgment Granted to Defendants in a Securities Fraud Action Based on
Plaintiffs’ Failure to Prove Reliance• Southern District of California: Digital Tokens Sold in Initial Coin Offerings Are Securities
February/March 2019

Second Circuit: “Tentativeand Generic” ComplianceRelated Statements Are Not
Actionable Securities Fraud

Simpson Thacher’s“deep bench of trial andappellate lawyers” is“regularly retained to act
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On March 5, 2019, the Second Circuit
affirmed dismissal of a securities fraud action
alleging that a health services company mademisstatements concerning its regulatorycompliance. Singh v. Cigna Corp., 2019 WL
1029597 (2d Cir. 2019) (Cabranes, J.). Thecourt cautioned that plaintiffs cannot assert“a prima facie case of securities fraud” merely
by “point[ing] to banal and vague corporate
statements affirming the importance ofregulatory compliance” coupled with“significant regulatory violations.” The courtemphasized that “such generic statements do
not invite reasonable reliance.”
The Second Circuit found that compliancerelated statements in the company’s Codeof Ethics were “textbook example[s] ofpuffery” because they were simply “generalSimpson Thacher & Bartlett LLP

declarations about the importance of acting
lawfully and with integrity.” The court
explained that broad and non-specific“statements about reputation, integrity, andcompliance with ethical norms . . . are too
general to cause a reasonable investor to relyupon them.”
The Second Circuit further held that areasonable investor would not rely upon
the “tentative and generic” compliancerelated statements in the company’s SEC
filings, particularly because those statements
were “framed by acknowledgements of thecomplexity and numerosity of applicableregulations.” The court observed that“[s]uch framing suggests caution (ratherthan confidence) regarding the extent of[the company’s] compliance.” The court
also noted that in cases where it has
found compliance-related statements
to be “actionable assurances of actual
compliance, the descriptions of such[compliance-related] efforts were far moredetailed” than those at issue in the casebefore it.

Eighth Circuit: Omitting
Projected Net Income/LossInformation May Render a
Proxy Statement MateriallyMisleading in Violation ofSection 14(a) and Rule 14a-9
On March 1, 2019, the Eighth Circuit reversed
the dismissal of a securities fraud action
alleging that a company’s proxy statement
in connection with a proposed merger wasmaterially misleading in violation of Section
14(a) of the Securities Exchange Act of1934 and SEC Rule 14a-9 where the proxystatement failed to disclose projected net
income/loss information for the pre-merger
target company. Campbell v. Transgenomic,
2019 WL 983676 (8th Cir. 2019) (Benton, J.).
The Eighth Circuit reasoned that “projected
net income/loss is not trivial information”
and “may be of more significance to investors
than revenue.”
The district court had noted that Section
14(a) and SEC Rule 14a-9 are not “sobroad as to require the proxy statement toinclude every possible financial disclosurethat may be relevant to the valuation of abusiness.” Campbell v. Transgenomic, 2018
WL 2063348 (D. Neb. May 3, 2018). The
district court determined that “the crux of theanalysis is this: where the proxy statement
chooses to disclose a financial valuation, doesit do so honestly?” The district court foundthat the net income/loss data did not “callinto question the accuracy of the information
disclosed” in the proxy statement, suchas revenue distributions, and dismissed
plaintiffs’ claims.
On appeal, the Eighth Circuit found thedistrict court had applied “the wrong inquiry.”
The Eighth Circuit explained that “Section
14(a) was intended to promote the free
exercise of the voting rights of stockholders
by ensuring that proxies would be solicitedwith explanation to the stockholder of the realnature of the questions for which authority
to cast his vote is sought.” The Eighth Circuit
stated that, for purposes of SEC Rule 14a-9,“[a]n omitted fact is material if there is a
substantial likelihood that a reasonable
shareholder would consider it important indeciding how to vote.” The court further notedthat “[u]nder this test it is not necessary toprove that disclosure of an omitted fact would

have caused a reasonable investor to change
his decision.”
The Eighth Circuit observed that it has“considered net income to be among the threemost valuable figures in determining thefairness of an acquisition under the ClaytonAct.” The Eighth Circuit found that the premerger company’s net income/loss figureswere particularly relevant in the case before
it because the proxy statement included
gross profit projections for the pre-merger
company. The Eighth Circuit found that “[b]yomitting the (allegedly) significantly lower
projections for [the company’s] net income/loss, the proxy statement may have presented[the company] in a false light that wasmaterially misleading.” The Eighth Circuit
concluded that “a reasonable investor may
have viewed disclosure of [the company’s] net
income/loss as having significantly altered
the total mix of information made available,”and therefore “the materiality of the omission
was improperly resolved as a matter of law.”
In so holding, the Eighth Circuit underscoredthat “[d]oubts as to the critical nature of
information misstated or omitted” should be“resolved in favor of those [SEC Rule 14a-9] isdesigned to protect.”Southern District of New
York: Duty to Disclose Under
Item 303 of Regulation S-K
Is Limited to “Known Risks”
With a “Fairly Substantial
Probability” of Having a“Material Impact”
On February 26, 2019, the Southern Districtof New York dismissed in its entirety asecurities fraud action against an onlinehotel search platform operator and theunderwriters of its IPO. Holbrook v. Trivago,
2019 WL 948809 (S.D.N.Y. 2019)(Buchwald, J.).1 The court found defendants
had no obligation under Section 11 of theSecurities Act of 1933 to disclose in thecompany’s IPO Registration Statement either(i) violations of the company’s landing page
standards by the company’s largest advertiser,or (ii) a modification to the company’smarket algorithm known as the “relevance
1. Simpson Thacher represents the underwriters of Trivago’s
initial public offering in this matter.
2

assessment” that imposed financial penalties
on advertisers that failed to adhere to thecompany’s landing page standards. The
relevance assessment temporarily boosted
revenues in the months following the IPO,
but revenues dropped once advertisers
began conforming their landing pages to thecompany’s standards.
Plaintiffs contended that defendants had
a duty to disclose these issues under Item
303 of Regulation S-K, which requires
the disclosure of “any known trends or
uncertainties that have had or that theregistrant reasonably expects will havea material favorable or unfavorable
impact on net sales or revenues or income
from continuing operations.” 17 C.F.R.
§ 229.303(a)(3)(ii). The court explainedthat Item 303’s “‘reasonably expects will
have’ standard suggests that there must be afairly substantial probability that the known
risk at issue will materialize and have amaterial impact—if not a more-likely-thannot standard, then something not too much
below that.”of the IPO Registration Statement materiallymisleading. The court explained that “[t]hetouchstone for a finding that otherwise true
statements have been rendered misleading byomissions is whether such information wasnecessary in light of the context, manner ofpresentation, and language of the statements
at issue so that what was revealed would not
be so incomplete as to mislead.” The court
noted that “a duty to disclose does not spring
solely from plaintiffs’ interest in that omitted
fact.” Here, the court found there was no
duty to disclose triggered by, for example, thecompany’s “broad, non-specific description ofpricing” or its enumeration of a generalized
and “non-exclusive list of factors that could
cause [the company] to downwardly deviate
from its historical growth rates.”
The court dismissed plaintiffs’ claims underSections 11 and 15 of the Securities Act, as well
as plaintiffs’ related claims under Sections
10(b) and 20(a) of the Securities Exchange
Act of 1934. The court denied plaintiffs leaveto amend.

The court found plaintiffs failed to plead“any factual allegation from which to inferthat” the violations of the company’s landing
page standards by its largest advertiser were“of the scope and magnitude necessary to
impute knowledge of likely materiality.”The court further found that the company’s
implementation of the relevance assessment
to incentivize the advertiser’s compliance
was “of no moment.” The court reasoned that“[t]he mere fact of a change in policy does notrender the impetus for that change material
for purposes of Item 303.”
The court deemed equally meritless plaintiffs’
contention that the company “should have
known that the relevance assessment would
have a significant impact on future revenues
because it had observed increased revenue
attributable to the relevance assessment for(at most) 15 days” prior to the IPO. The court
reasoned that “[t]he payment of penalties ofunspecified scale and significance over such a
brief period of time simply does not support
conclusions about how or when advertisers
would react to the relevance assessment going
forward from the time of” the IPO. The court
stated that “as a matter of law 15 days does
not a trend make.”
The court also rejected plaintiffs’ argumentthat these omissions rendered other aspects

District of Minnesota:
Summary Judgment Grantedto Defendants in a Securities
Fraud Action Based on
Plaintiffs’ Failure to Prove
RelianceOn March 8, 2019, the District of Minnesota
granted defendants’ motion for summary
judgment in a long-pending securities
fraud action against a major electronics
retailer. IBEW Local 98 Pension Fund v.
Best Buy Co., 2019 WL 1102714 (D. Minn.
2019) (Frank, J.).2 The court dismissed
2. Simpson Thacher represents Best Buy and several of its
executives in this action.
3

plaintiffs’ claims in full and with prejudicebecause plaintiffs failed to meet theirburden of proving reliance upon alleged
misrepresentations made during a September
14, 2010 conference call.

Southern District ofCalifornia: Digital Tokens
Sold in Initial Coin Offerings
Are Securities
On February 14, 2019, the Southern Districtof California held that digital tokens sold in
an initial coin offering (“ICO”) constitutesecurities under the test set forth in SEC
v. W.J. Howey Co., 328 U.S. 293 (1946).
SEC v. Blockvest, 2019 WL 625163 (S.D. Cal.
2019) (Curiel, J.) (Blockvest II).

Plaintiffs sought to invoke the fraud-on-themarket presumption of reliance establishedin Basic v. Levinson, 485 U.S. 224 (1988).
The district court initially granted classcertification, but the Eighth Circuit reversed
because it found that defendants “rebuttedthe Basic presumption by submitting direct
evidence . . . that severed any link between thealleged conference call misrepresentations
and the stock price at which plaintiffs
purchased.” IBEW Local 98 Pension Fund v.
Best Buy Co., 818 F.3d 775 (8th Cir. 2016).3
Following the Eighth Circuit’s ruling, thedistrict court found that plaintiffs could
only “proceed with traditional evidence ofreliance.” IBEW Local 98 Pension Fund v.
Best Buy, 2017 WL 2728399 (D. Minn. June23, 2017).
Defendants later moved for summary
judgment on the ground that plaintiffs
could not satisfy their burden of proving
actual reliance. Defendants cited the leadplaintiff’s testimony that he had not heard
or read about the conference call statements
prior to purchasing the company’s shares.
Defendants also pointed out that there was noevidence in the record that either of the othertwo plaintiffs had relied on the conference
call statements in purchasing their shares.
Because the court found that there was no
genuine dispute of material fact concerning
actual reliance, the court determined that
there was “no triable claim for securities
fraud.”

3. Please click here to read our prior discussion of the Eighth
Circuit’s decision in Best Buy.

An ICO is a “fundraising event” in which anentity offers investors unique digital tokens
or assets in exchange for virtual currency orother consideration. Each digital token “mayentitle its holders to certain rights related
to a venture underlying the ICO, such as
rights to profits,” and “may also be listed on
online trading platforms.” Issuers typicallypromote ICOs through social media and other
online methods, and also “usually release a‘Whitepaper’ describing the project and theterms of the ICO.”In Blockvest, the SEC brought suit against acompany that offered digital tokens throughan allegedly fraudulent ICO, as well as thecompany’s chairman, under Section 10(b)of the Securities Exchange Act of 1934 andSections 17(a)(1), (2) and (3) of the Securities
Act of 1933, among other claims. The SEC
moved for a preliminary injunction to halt
the ICO and freeze the assets of the company
and its chairman. The Southern District ofCalifornia initially found that it could not
determine whether the digital tokens at issue
constituted securities and denied the SEC’smotion for a preliminary injunction, but
granted the SEC’s request to freeze assets
and protect investors from the potential
dissipation of the company’s and CEO’s
assets. SEC v. Blockvest, 2018 WL 6181408(S.D. Cal. Nov. 27, 2018) (Curiel, J.).
On reconsideration, the court held thatthe digital tokens offered in the ICO atissue satisfied “Howey’s three-part test”
for determining whether an investmentopportunity is a “security.” Howey “requires(1) an investment of money (2) in a common
enterprise (3) with an expectation of profits
produced by the efforts of others.” The
Blockvest II court explained that “[a]ninvestment of money can take the form ofgoods and services . . . or exchange of value.”4

The court found that “[d]efendants’ website
and their Whitepaper’s invitation to potential
investors to provide digital currency in returnfor [digital] tokens satisfies” the first prong of
the Howey test. The court held that Howey’s
second prong was met because defendants“claimed that the funds raised [through theICO] will be pooled and there would be a
profit sharing formula.” Finally, the court
determined that Howey’s third prong was
satisfied because, “as described on the website
and Whitepaper, the investors in [the ICO]
would be ‘passive’ investors and the [digital]
tokens would generate ‘passive income.’” Thecourt concluded that “the promotion of theICO of the [company’s] token was a ‘security’”under the Howey test.
The Blockvest II court granted the SEC’s
motion for a preliminary injunction withrespect to the ICO even though defendants
contended that the digital tokens weredesigned merely for the purposes of testing
the company’s platform, and no actual salesof the tokens had taken place. The court
found defendants could nevertheless facesecurities fraud liability because defendants’promotion of the ICO constituted an “offer”
of unregistered “securities” for purposes ofSection 17(a). The court stated that “Section
17(a) is intended to cover any fraudulent
scheme in an offer or sale of securities,
whether in the course of an initial distribution
or in the course of ordinary market trading.”
The court explained that “[u]nder securities
law and caselaw, the definition of ‘offer’is broad and there is no requirement that
performance must be possible or thatthe issuer must be able to legally bind apurchaser.”This edition of theSecurities Law Alert was edited byAlexis S. Coll-Veryacoll-very@stblaw.com / +1-650-251-5201,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,

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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Washington, D.C.
Jeffrey H. Knox
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cscarboro@stblaw.com
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