Securities Law Alert
In This Edition:• Sixth Circuit: Alleging That Index Funds Outperformed Managed Funds Fails to State a Breach ofthe Duty of Prudence Claim• Ninth Circuit: Market Growth and Sales Performance Statements Determined to Be Non-Actionable
Puffery• Northern District of California: Dismissal Denied Where Defendants Touted That a Target Company
Founder Would Play a Critical Post-Merger Role When the Founder Was In Fact Marginalized
July/August 2022

Sixth Circuit: Alleging ThatIndex Funds Outperformed
Managed Funds Fails toState a Breach of the Duty ofPrudence ClaimSimpson Thacher’s“deep bench of trial andappellate lawyers” is “regularlyretained to act on multibilliondollar securities class actions
and derivative suits.”– Chambers USA

On June 21, 2022, the Sixth Circuit affirmed
a district court’s dismissal of a putative classaction alleging that a healthcare company
and its 401(k) plan administrator breached
the duty of prudence under ERISA byoffering several actively managed investment
funds when available index funds offeredhigher returns and lower fees. Smith v.
CommonSpirit Health, 37 F.4th 1160 (6thCir. 2022) (Sutton, J.). The court held thatplaintiff failed to plead that defendants
acted imprudently in offering the managed
funds by alleging only that the managed
funds’ performance trailed the index funds’
performance over a period of five years.

Background
Plaintiff, a former healthcare company
employee, participated in the company’s
defined contribution 401(k) plan. The planoffered several actively managed funds andSimpson Thacher & Bartlett LLP

several index funds. Plaintiff commenced aclass action against the company and the plan
administrator claiming breach of fiduciary
duty under ERISA,1 arguing that it was abreach of the duty of prudence for defendants
to offer actively managed investment funds
when available index funds offered higher
returns and lower fees. Plaintiff pointed tothree-year and five-year periods in which
three actively managed funds trailed the rates
of return for related index funds. The district
court dismissed the case, concluding thatplaintiff failed to allege facts from which it
could plausibly infer that the company andplan administrator acted imprudently.

The Duty of Prudence Is Context
Specific
On appeal, the Sixth Circuit consideredvarious Supreme Court precedents
concerning the duty of prudence underERISA. Under Tibble v. Edison Int’l, 575 U.S.
523 (2015), a fiduciary’s duty of prudence
creates “a continuing duty to monitor trust
investments and remove imprudent ones.”
The Court also has stated that “[b]ecause
the content of the duty of prudence turns on
1. 29 U.S.C. § 1132(a)(2).

the circumstances prevailing at the time thefiduciary acts, the appropriate inquiry will
necessarily be context specific.” Fifth Third
Bancorp v. Dudenhoeffer, 573 U.S. 409(2014). In addition, the Court has recently
held that, because ERISA fiduciaries facedifficult tradeoffs, “courts must give due
regard to the range of reasonable judgments a
fiduciary may make based on her experienceand expertise.” Hughes v. Nw. Univ., 142 S.
Ct. 737 (2022).

The Sixth Circuit held that plaintiff failed
to plausibly plead that the company acted
imprudently merely by offering any actively
managed funds in its mix of investment
options as a general matter. With respect tothe specific funds, the court also held thatplaintiff failed to plausibly plead that thecompany violated ERISA by imprudently
offering these specific actively managed
funds. After noting index funds’ positivefeatures (mix of investment types and low
management fees), the court stated that thosefeatures do not “make all other fund types
imprudent.” In other words, the fact thatindex funds have positive features does notmean that actively managed funds do not also
have positive features or that some investors
may not prefer managed funds. The court
pointed out that while an actively managed
fund may cost more than an index fund, it
may generate greater returns in the long term.

Merely Alleging Another Investment
Performed Better Does Not Pleadan Imprudent Decision
The court stated that while a plaintiff
generally must identify an alternative courseof action (e.g., another fund in which the plan
might have invested) to show imprudence,
alleging such an alternative course of action
is not sufficient to plead a claim. Rather, thecourt explained that “these claims require
evidence that an investment was imprudent
from the moment the administrator selectedit, that the investment became imprudent
over time, or that the investment wasotherwise clearly unsuitable for the goals of
the fund based on ongoing performance.”
Accordingly, the court concluded that merely
pointing to another investment that has
performed better over a five-year period does
not plausibly plead an imprudent decision.
The court observed that to rule otherwise
would mean that every actively managed
fund with below-average results over themost recent five-year period would create aplausible ERISA violation; this in turn could
cause plan administrators to avoid including
any managed funds as plan options.
The court noted that its reasoning was similar
to how the Eighth Circuit had evaluateda similar claim in Davis v. Washington
University in St. Louis, 960 F.3d 478 (8th Cir.
2020). In Davis, the Eighth Circuit concluded
that it was not imprudent for a fiduciary tooffer both actively managed stock and realestate funds along with passively managedfunds. The Davis court explained that the twogeneral investment options “have different
aims, different risks, and different potentialrewards that cater to different investors.
Comparing apples and oranges is not a way
to show that one is better or worse thanthe other.” Refusing plaintiff’s invitation tocompare the performance of actively managed
funds and index funds within a five-year
timeframe, the Sixth Circuit concluded thatERISA “does not give the federal courts abroad license to second-guess the investment
decisions of retirement plans.”

Ninth Circuit: Market Growthand Sales Performance
Statements Determined to Be
Non-Actionable Puffery
On July 7, 2022, the Ninth Circuit affirmed
a district court’s dismissal of a securities
fraud class action against a medical productmanufacturer and certain of its executives
alleging that senior executives misrepresented
the company’s sales growth in China.
Macomb Cnty. Emps. Ret. Sys. v. Align Tech.,
39 F.4th 1092 (9th Cir. 2022) (McKeown, J.).
2

The court agreed with the district court thatsix of the challenged statements were puffery.

Background
For a number of years, the company had
double-digit revenue growth rates in China.
For example, in every quarter in 2017 and2018, the company’s year-over-year revenue
growth rate in China was between 70%
and 100%. However, at the beginning of2019, the company’s revenue growth rate in
China decreased, and in Q2 the rate fell to
between 20% and 30%. These decreases were
followed by a stock drop of approximately
27%. Subsequently, the plaintiff pension plan
filed a class action under Section 10(b) andRule 10b-5, alleging that company executives
had misrepresented the company’s growthin China throughout Q2 of 2019, “claiming
strong numbers despite knowing (orrecklessly disregarding) that the growth rate
in China had slowed significantly.”
The district court dismissed the action
with prejudice, holding that the challenged
statements, which described the market forthe company’s products in China and thecompany’s performance there, were either
non-actionable puffery or were not false ormisleading. Plaintiff appealed.

Vague, Generically PositiveStatements Were Puffery
On appeal, the court held that the district
court correctly found that six of thechallenged statements were non-actionablepuffery. Under Ninth Circuit precedent,
puffery involves “expressing an opinion thatis not capable of objective verification.” RetailWholesale & Dep’t Store Union Local 338 Ret.
Fund v. Hewlett-Packard, 845 F.3d 1268 (9thCir. 2017). Such statements are not actionablebecause professional investors, and mostamateur investors, “know how to devalue theoptimism of corporate executives.” PoliceRet. Sys. of St. Louis v. Intuitive Surgical,
759 F.3d 1051 (9th Cir. 2014). The Ninth
Circuit explained that six of the challenged
statements used vague, generically positiveterms, such as describing China as “a greatgrowth market,” “a huge market opportunity,”and “a market that’s growing significantly
for us,” as well as describing the company’s
performance in China as “tremendous” and“great.” The court determined that suchcharacterizations were not “objectivelyverifiable” and did not present the kind of“precise information” on which investors rely.

The District Court Did Not
Err As the Statements Were
Not Made Against a Clearly
Pessimistic Backdrop
Plaintiff argued that the district court erredby failing to “consider the context” in whichthese six statements were made. The Ninth
Circuit disagreed. Citing Intuitive Surgical,
the court explained that this was not a casewhere “general statements of optimism” were“made against a clearly pessimistic backdrop,”
which “may form a basis for a securities fraudclaim[.]” Rather, on the facts at issue, thecourt emphasized that when the executives“made the six challenged statements, thecompany’s sales were still growing in China,
albeit at a diminished rate, so these feelgood descriptions . . . did not ‘affirmatively
create an impression of a state of affairs thatdiffered in a material way from the one thatactually existed.’” Quoting In re Quality Sys.
Sec. Litig., 865 F.3d 1130 (9th Cir. 2017)(emphasis in original).

Northern District of California:
Dismissal Denied Where
Defendants Touted That aTarget Company Founder
Would Play a Critical
Post-Merger Role When
the Founder Was In Fact
Marginalized
On July 1, 2022, the Northern Districtof California denied in part a motion todismiss a securities fraud class action arisingout of a reverse merger between a private
technology company and a SPAC alleging
that the company, certain of its executives
and directors, and certain SPAC co-founders/
executives made false or misleadingstatements or omissions that deceived
investors into approving the merger andinto purchasing company securities at an
inflated price. Moradpour v. Velodyne Lidar,
2022 WL 2391004 (N.D. Cal. July 1, 2022)(Illston, J.). The court held that plaintiffs
3adequately alleged that the technology
company and two individual defendants
misleadingly touted that the technology
company’s founder would play a key rolepost-merger when in fact steps were being
taken to oust him.2
The reverse merger closed in September
2020. Plaintiffs claimed that defendants madea number of misleading statements about thefounder’s post-merger role. These included aJuly 2, 2020 joint press release announcing
the merger that stated that the founder would“continue to play a critical role as executive
chairman of [the resulting company]” after
the merger; a July 2, 2020 conference call inwhich one defendant (a SPAC co-founder/
executive who later became chair of thecompany’s board) discussed the management
and engineering talent that the founder“has and will continue to assemble”;
a statement in the same conference call by
the technology company’s President/CEO
that the founder “will remain very involvedin the engineering and technology vision ofthe Company”; and a July 2020 preliminary
proxy stating that the founder “will serve as
the post-combination company’s executive
chairman and will remain actively involved
2. Plaintiffs also claimed that defendants: (i) misrepresented thecompany’s revenue and growth trajectory in the run-up to themerger’s approval and in the months that followed; (ii) misledshareholders about another company’s continued involvement
as a strategic investor and customer; and (iii) misledshareholders about the quality of the company’s corporate
governance and internal control over financial reporting. The
court determined that plaintiffs failed to allege a violation ofSection 10(b) based on these challenged statements.

in the post-combination company’s productand technology development strategy.” In
addition, in January 2021, the company
published an FY2020 Release, in which thecompany’s President/CEO stated that “thereis no change in our fundamental outlook forthe future” despite the impact of COVID-19.
Defendants moved to dismiss. On the issueof the founder’s ongoing role, the court
concluded that plaintiffs adequately alleged
Section 10(b) and Rule 10b-5(c) claims
against the technology company, the SPAC
co-founder/executive who later becameboard chair of the resulting company,
and the technology company’s President/
CEO for intentionally touting the founder’scontinued involvement in the company while
taking actions that contradicted the notionof such continued involvement. The court
determined that plaintiffs adequately allegedthat defendants’ various statements weremisleading because the board had disregardedthe founder’s input on corporate governance,strategy, and financial performance since
the merger’s consummation and the founder
had already “stepped back from day-to-daymanagement” seven months before themerger. As to the FY2020 Release, the court
pointed out that earlier that same day thefounder had already tendered his voluntary
resignation as Executive Chairman. The court
observed that his resignation would qualify asa change to the company’s outlook given hisstatus as founder and as “an industry icon” as
described in the July 2020 preliminary proxy.

This edition of theSecurities Law Alert was edited by
Meaghan A. Kelly / +1-202-636-5542
mkelly@stblaw.com
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com andSimona G. Strauss / +1-650-251-5203
sstrauss@stblaw.com

4New York

Los Angeles

Martin S. Bell+1-212-455-2542
martin.bell@stblaw.com

Michael J. Osnato, Jr.
+1-212-455-3252
michael.osnato@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

Marc P. Berger+1-212-455-2197
marc.berger@stblaw.com

Joshua Polster+1-212-455-2266
joshua.polster@stblaw.com

Palo Alto

Stephen M. Cutler+1-212-455-2773
stephen.cutler@stblaw.com

Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Michael J. Garvey+1-212-455-7358
mgarvey@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

David Elbaum
Senior Counsel+1-212-455-2861
david.elbaum@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com
Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com
Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Janet A. Gochman
Senior Counsel+1-212-455-2815
jgochman@stblaw.com

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Meaghan A. Kelly+1-202-636-5542
mkelly@stblaw.com
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Karen Porter+1-202-636-5539
karen.porter@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor thelawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
5SimpsonThacherWorldwide

UNITED STATESEUROPEASIANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

Brussels
Square de Meeus 1, Floor 7
B-1000 Brussels
Belgium+32-472-99-42-26

Beijing
3901 China World Tower A1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999

Houston
600 Travis Street, Suite 5400
Houston, TX 77002+1-713-821-5650
Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500
Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000
Washington, D.C.
900 G Street, NW
Washington, D.C. 20001+1-202-636-5500

LondonCityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
TokyoArk Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

SOUTH AMERICA

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

6