Securities Law Alert
We are pleased to announce that Michael J. Osnato, Jr., former Chief of the Complex Financial Instruments Unit of the SEC’s
Enforcement Division, has joined Simpson Thacher as a Partner in the Firm’s Government and Internal Investigations Practice.

In This Edition:• First Circuit: Country Club Member Expected to Receive a “Personal Benefit,” as Defined in the Supreme
Court’s Decisions in Dirks and Salman, for Tipping a Fellow Club Member• Ninth Circuit: Dodd Frank Act’s Anti-Retaliation Provision Protects Whistleblowers Who Report Potential
Misconduct Internally as Well as Whistleblowers Who Report to the SEC• Central District of California: (1) Plaintiffs Cannot Plead Failure to Disclose a Material Risk ThroughAllegations of Fraud by Hindsight, and (2) “Absurd to Suggest” Exception to Core Operations Theory
Requires More Than “Vague Quantifiers”• Delaware Supreme Court: Business Judgment Rule Applies to Two-Step Section 251(h) Mergers If theTarget Corporation’s Fully-Informed, Uncoerced Stockholders Tender a Majority of the Company’s Sharesin a First-Step Tender Offer• Delaware Chancery Court: Plaintiff Seeking Corporate Books and Records in a Section 220 Suit Must Be a
Stockholder at the Time the Complaint is Filed

March 2017

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Simpson Thacher & Bartlett LLPFirst Circuit: Country Club
Member Expected to Receive
a “Personal Benefit,” asDefined in the Supreme
Court’s Decisions in Dirks andSalman, for Tipping a Fellow
Club Member
On February 24, 2017, the First Circuit
affirmed the insider trading conviction ofa country club member (the “tippee”) who
received a tip about an upcoming bankacquisition from a fellow country clubmember. United States v. Bray, 2017 WL
727556 (1st Cir. 2017) (Stahl, J.). The court
found evidence of a friendship between the
tipper and the tippee, together with thetipper’s testimony that he believed the tip
would enhance his reputation with the tippee,provided a reasonable basis for the jury toconclude that the tipper expected to receive
a “personal benefit” for his tip as required
under the Supreme Court’s decision Dirks v.
SEC, 463 U.S. 646 (1983).

Jury Had Sufficient Evidence
to Find the Tipper Expected a“Personal Benefit” for the Tip
The First Circuit explained that tippee liability“hinges on whether the tipper breached aduty of trust and confidence by disclosing theinside information, which in turn depends onwhether the tipper ‘personally will benefit,
directly or indirectly, from [the] disclosure.’”Id. (quoting Dirks, 463 U.S. 646). The First
Circuit noted that “a personal benefit can‘often’ be inferred where ‘a relationshipbetween the [tipper] and the recipient …
suggests a quid pro quo from the latter, or an
intention to benefit the particular recipient.’”Id. (quoting Dirks, 463 U.S. 646). “A personal
benefit can likewise be inferred where a tipper
makes a gift of ‘inside information to a trading
relative or friend.’” Id. (quoting Salman
v. United States, 137 S. Ct. 420) (internal
quotation marks and citation omitted).1

a benefit ‘down the road.’” The First Circuit
observed that the tippee’s “later offers tobring [the tipper] into [one of the tippee’s realestate projects] for free … show[ed] that these
expectations were warranted.”

In the case before the First Circuit, the tippee
contended that “an informational exchange
between casual, as opposed to close, friends
does not meet Dirks’s personal benefit
requirement without some other evidence ofa quid pro quo exchange.” The First Circuit
found that it did not have to “determine …
how ‘close’ a tipper-tippee relationship must
be before a jury can infer a gift-based personal
benefit.” Here, the tipper testified that he andthe tippee were “‘good friends’ who, at thetime of the … tip, had known each other for
fifteen years.” The court also found testimony
concerning the tippee’s “bond” with thetipper’s son “demonstrated that [the tippee]knew [the tipper] well enough to extend
favors to [the tipper’s] extended family.”
The First Circuit held “the government [had]presented enough evidence for a reasonable
jury to conclude that [the tippee] and[the tipper] had a close relationship, and not
one that was ‘of a casual or social nature.’” Id.
(quoting United States v. Newman, 773 F.3d
438 (2d Cir. 2014)).2

Jury Also Had Sufficient Evidence
to Find the Tippee Knew the Tipper
Expected a “Personal Benefit” forthe Tip, and Breached a Duty ofConfidentiality in Passing Along
the Tip

The First Circuit further held the tipper’s“testimony … provided a sufficient basis
for the jury to conclude that [the tipper]
disclosed the tip in expectation of a personal
benefit.” The tipper testified that he “‘figured[the tip] would enhance’ his reputation with[the tippee].” Although the tipper represented
that he “did not expect anything at the exacttime” of the tip, the First Circuit found “areasonable jury could infer that he expected
1. Please click here to read our prior discussion of the Supreme
Court’s decision in Salman.
2. Please click here to read our prior discussion of the Second
Circuit’s decision in Newman.

The First Circuit determined that there was“sufficient evidence in the record to support
a finding that [the tippee] knew [the tipper
had] tipped him in expectation of a personal
benefit” even though the tippee “may not have
known the exact benefit [the tipper] sought
in exchange for the tip.” The court found it
significant that shortly after receiving the tip,
the tippee offered the tipper an opportunity toinvest in a real estate project—something he
had never done prior to receiving the tip.
The First Circuit further held that“[a] reasonable jury could also infer that[the tippee] knew [the tipper] had breacheda duty of confidentiality by giving him
the … tip.” The tipper provided the tip “ina surreptitious manner” (scribbled on a
cocktail napkin), “after which [the tippee]
neither made any comments nor asked anyquestions.” The tippee then proceeded toacquire tens of thousands of shares of thecompany the tipper mentioned, and theseshares ultimately accounted for more thanhalf of the tippee’s portfolio.
The First Circuit concluded that “all of
the evidence regarding the tip and its
aftermath show that there was a sufficientbasis from which a jury could reasonably
conclude beyond a reasonable doubt that[the tippee] knew [the tipper] had anticipateda benefit and breached a fiduciary duty to
his employer.”2

Ninth Circuit: Dodd Frank
Act’s Anti-Retaliation Provision
Protects Whistleblowers Who
Report Potential Misconduct
Internally as Well as
Whistleblowers Who Reportto the SEC
On March 8, 2017, the Ninth Circuit heldthat the Dodd-Frank Act’s anti-retaliation
provision “should be read to provide
protections to [whistleblowers] who reportinternally as well as to those who report to theSEC.” Somers v. Digital Realty Trust, 2017
WL 908245 (9th Cir. 2017) (Schroeder, J.).
The Ninth Circuit found that to the extent
there is any “uncertainty” on this issue, theSEC’s implementing regulation defining theterm “whistleblower” to include “those who
make internal disclosures” “has resolved any
ambiguity and … is entitled to deference.” Id.
(citing 17 C.F.R. § 240.21F-2).
In so holding, the Ninth Circuit deepened acircuit split on the question of whether the
Dodd-Frank Act’s anti-retaliation provision
reaches whistleblowers who do not report to
the SEC. The Second Circuit has ruled thatthe Dodd-Frank Act protects whistleblowers
who report potential misconduct internally,
while the Fifth Circuit has held that theanti-retaliation protections only apply towhistleblowers who report to the SEC.
Compare Berman v. Neo@Ogilvy, 801 F.3d
145 (2d Cir. 2015)3 with Asadi v. G.E. Energy(USA), 720 F.3d 620 (5th Cir. 2013).4

Ninth Circuit Finds the
Statutory Definition of the Term
“Whistleblower” Does Not Limit the
Reach of the Dodd-Frank Act’s AntiRetaliation Provision
The Dodd-Frank Act defines a“whistleblower” as “any individual who
provides … information relating to a violationof the securities laws to the Commission.”
15 U.S.C. § 78u-6(a)(6). The Ninth Circuit
acknowledged that “[t]his definition …
describes only those who report information
to the SEC.” Somers, 2017 WL 908245.
3. Please click here to read our prior discussion of the Second
Circuit’s decision in Berman.
4. Please click here to read our prior discussion of the Fifth
Circuit’s decision in Asadi.

However, the Ninth Circuit explainedthat subdivision (iii) of the Dodd-Frank
Act’s anti-retaliation provision “gives
whistleblower protection to all those who
make any required or protected disclosure
under [the] Sarbanes-Oxley [Act] and allother relevant laws.” Id. (citing 15 U.S.C.
§ 78u-6(h)(1)(A)). The court noted that the“Sarbanes-Oxley [Act] expressly protects
those who lawfully provide information
to … ‘a person with supervisory authority
over the employee.’” Id. (citing 18 U.S.C.
§ 1514A(a)). The Ninth Circuit determinedthat “[b]y broadly incorporating, throughsubdivision (iii), Sarbanes-Oxley’s
disclosure requirements and protections,[the Dodd-Frank Act] necessarily bars
retaliation against an employee of a publiccompany who reports violations to the boss.”

The Ninth Circuit found the Dodd-Frank
Act’s definition of the term “whistleblower”“should not be dispositive of the scope of” theanti-retaliation provision. The court reasoned
that “[t]erms can have different operative
consequences in different contexts.” In thiscase, the court determined that “[r]eading
the use of the word ‘whistleblower’ in theanti-retaliation provision to incorporate theearlier, narrow definition would make little
practical sense and [would also] undercut
congressional intent.” The Ninth Circuit
agreed with the Second Circuit’s finding inBerman that such an interpretation would“narrow[ ]” subdivision (iii) of the DoddFrank Act’s anti-retaliation provision “to thepoint of absurdity” because “the only class of
employees protected [under subdivision (iii)]
would be those who had reported possible
securities violations both internally and to3

the SEC” but who were “fire[d] … solely on
the basis of the employee’s internal report.”
The Ninth Circuit found this reading of thestatute “illogical.”Ninth Circuit Disagrees with theFifth Circuit’s Decision in Asadi

found the SEC’s implementing regulation“accurately reflects congressional intent that[the Dodd-Frank Act] protect employees
whether they blow the whistle internally, as
in many instances, or they report directly to
the SEC.”

The Ninth Circuit expressly disagreed
with the Fifth Circuit’s decision in Asadi.
There, the Fifth Circuit found the statutory
definition of “whistleblower” applied to
the Dodd-Frank Act’s anti-retaliation
provision. The Fifth Circuit “reasoned thatif [the Dodd-Frank Act] protected the same
conduct that [the] Sarbanes-Oxley [Act] did,then the Sarbanes-Oxley enforcement scheme
would be rendered moot or superfluous, on
the theory that no one would use it” in lightof the Dodd-Frank Act’s more favorable
provisions. Somers, 2017 WL 908245.

Central District of California:(1) Plaintiffs Cannot Plead
Failure to Disclose a Material
Risk Through Allegationsof Fraud by Hindsight, and(2) “Absurd to Suggest”
Exception to Core Operations
Theory Requires More Than
“Vague Quantifiers”

The Ninth Circuit found the two “statutes
provide alternative enforcement mechanisms”
that offer different advantages to different
types of plaintiffs. The court noted thatthe “Sarbanes-Oxley [Act] may be more
attractive to the whistleblowing employee”
because of its option for adjudication
through administrative review, as well as its
compensation for special damages, such as
emotional injury.

On March 15, 2017, the Central District ofCalifornia dismissed a putative securities
fraud class action against a solar energy
company (the “Company”). Knox v. Yingli
Green Energy Holding Co., 2017 WL
1013293 (C.D. Cal. 2017) (Wright, II, J.).5
The court held plaintiffs could not plead
failure to disclose a material risk simply
by contrasting the Company’s optimistic
statements concerning a Chinese government
subsidy program with subsequent adverse
developments impacting the profitabilityof that program. The court further held
plaintiffs could not rely on the “absurd tosuggest” exception to the “core operations
doctrine” to plead scienter by offering only
“vague quantifiers.” The court explained that
this exception usually requires allegationsof “concrete numbers” concerning thealleged fraud.

Ninth Circuit Defers to the SEC’s
Implementing Regulation Defining
the Term “Whistleblower”
The Ninth Circuit agreed with the Second
Circuit’s determination that “even if theuse of the word ‘whistleblower’ in the antiretaliation provision [of the Dodd-Frank Act]
creates uncertainty because of the earlier
narrow definition of the term,” the SEC “hasresolved any ambiguity and its regulationis entitled to deference.” The Ninth Circuit

5. Simpson Thacher represents Yingli Green Energy Holding Co.
in this matter.

4

Background
The Company manufactured and sold solar
panels to companies around the world andhad a growing presence in the China market,
where the government was encouraging
the adoption of solar technology through a
subsidy program called “Golden Sun.” Thecase before the court concerned statements
the Company had made concerning theGolden Sun program. Plaintiffs claimed
the Company’s statements were misleading
because they failed to disclose that asignificant percentage of Golden Sun
subsidies were “procured through ‘outright
fraud,’” including by allegedly “overstating
project costs in subsidy applications”
and deliberately delaying construction of
approved Golden Sun projects until the costof materials dropped, thus putting the entire
Golden Sun program at risk of cancellation.
In March 2013, reports emerged predictingthat the Chinese government would end
the Golden Sun subsidy program. These
reports allegedly caused a 22% drop in the
Company’s share price. The following month,
the Chinese government issued clawback
notices to certain subsidy recipients that had
not completed their solar projects withincertain deadlines.

Plaintiffs Failed to Allege theCompany Had an Obligation to
Disclose the Risk of Clawbacks
The court deemed meritless plaintiffs’ claimthat the Company’s “optimistic statements
about the Golden Sun Program weremisleading because [the Company] failed todisclose the risk that the Chinese government… could clawback subsidies for projects thatwere not finished on time.”
The court recognized that Section 10(b)“require[s] that a company disclose the riskthat a future event might occur if that risk ismaterial.” However, the court emphasizedthat “Section 10(b) does not require thatcompanies predict the future.” The court
explained that “[a] plaintiff may not plead
fraud by hindsight” by “simply contrast[ing]a defendant’s past optimism with lessfavorable actual results in support of a claimof securities fraud.” Id. (internal quotation
marks and citation omitted).
Here, the court found that plaintiffs had “notpresented particular facts in existence at thetime of [the Company’s] optimistic statements
showing any likelihood that its customers
would not meet their project deadlines.” Thecourt determined there was “nothing [in thecomplaint] to show that potential clawbacks
presented a material risk to [the Company’s]
involvement in Golden Sun at [the] time”
the statements at issue were made, and theCompany therefore “need not have disclosedthat risk.”

Plaintiffs Failed to Allege
Scienter as to the Possibility
That the Chinese Government
Could Discontinue the Golden
Sun Program
The court found plaintiffs failed to allege
scienter with respect to their claims that theCompany did not “disclose the risk that the
Chinese government … would [allegedly]
likely discontinue the program due to[alleged] widespread fraud in procuringsubsidies.”
Plaintiffs attempted to “rely on the‘absurd to suggest’ exception to the core
operations theory—i.e., that Golden Sun
was so important to [the Company], and[the Company] was so involved in the
fraud, that it would be absurd to suggestthat [the Company] did not know ofit.” The court explained that “[t]he core
operations theory posits that facts critical toa business’s core operations or an importanttransaction generally are so apparent that
their knowledge may be attributed to thecompany and its key officers.” Id. (internal
quotation marks and citation omitted). While
plaintiffs in the Ninth Circuit “cannot rely[ ]exclusively on the core operations inference
to plead scienter under the” Private Securities
Litigation Reform Act, the court noted thatthe “only exception is the rare instance where
the nature of the relevant fact is of suchprominence that it would be absurd to suggestthat management was without knowledge ofthe matter.” Id. (internal quotation marks andcitation omitted).
In the case before it, the court found plaintiffs’
generalized “allegations … insufficient to showthat [the Company’s] upper managementknew of even [the Company’s] own alleged
fraud, let alone industry-wide fraud.” Forexample, plaintiffs alleged that the Company
engaged in a “widespread” practice of
substituting cheaper solar panels for more5

expensive ones. The court stated that it could
not “draw any meaningful inferences about
what [the Company’s] executives knew”
based on such “vague quantifiers.” The courtemphasized that “[t]he Ninth Circuit cases
relying on the ‘absurd to suggest’ doctrine
are usually based on concrete numbers,
not majestic generalities” of the typeplaintiffs alleged.
The court also found plaintiffs failed to plead
scienter as to claims alleging the Company
improperly delayed the recognition of
accounts for which collectability was notreasonably assured. The court dismissed
plaintiffs’ complaint in its entirety, with leave
to amend only certain of plaintiffs’ claims.

Delaware Supreme Court:
Business Judgment Rule
Applies to Two-Step Section
251(h) Mergers If the Target
Corporation’s Fully-Informed,
Uncoerced Stockholders
Tender a Majority of theCompany’s Shares in a FirstStep Tender Offer
Pursuant to Section 251(h) of the Delaware
General Corporation Law, companies may
complete two-step mergers without a target
company stockholder vote if the acquiring
corporation consummates a first-steptender offer.
On February 9, 2017, the Delaware Supreme
Court adopted the Chancery Court’s reasoning
in affirming a June 2016 Chancery Court
decision holding that the business judgment

rule applies to two-step Section 251(h)mergers if the target corporation’s fullyinformed, uncoerced stockholders tendera majority of the company’s shares in a
first-step tender offer. In re Volcano Corp.
Stockholder Litig., 2017 WL 563187 (Del.
2017) (Strine, C.J.). The Chancery Court
found that “the acceptance of a first-steptender offer by fully informed, disinterested,uncoerced stockholders representing amajority of a corporation’s outstanding
shares in a two-step merger under Section
251(h) has the same cleansing effect under”
the Delaware Supreme Court’s decision in
Corwin v. KKR Fin. Holdings, 125 A.3d 304(Del. 2015)6 “as a vote in favor of a merger
by a fully informed, disinterested, uncoerced
stockholder majority.” In re Volcano Corp.
Stockholder Litig., 143 A.3d 727 (Del. Ch.
2016) (Montgomery-Reeves, V.C.).7

Delaware Chancery Court:
Plaintiff Seeking Corporate
Books and Records in a
Section 220 Suit Must Be a
Stockholder at the Time theComplaint is Filed
On February 27, 2017, in a case of first
impression, the Delaware Chancery Court
held that a plaintiff seeking corporate books
and records in an action brought pursuant
to Section 220 of the Delaware General
Corporation Law must be a stockholder at
the time the complaint is filed. Weingarten v.
Monster Worldwide, 2017 WL 752179 (Del.
6. Please click here to read our prior discussion of the Delaware
Supreme Court’s decision in Corwin.
7. Please click here to read our prior discussion of the Chancery
Court’s decision in Volcano.

6Ch. 2017) (Glasscock, V.C.). The court found“the unambiguous language of Section 220(c)compels a finding that a former stockholder
squeezed out in a merger thereafterlacks standing to bring an action underthe [s]tatute.”
The Delaware Chancery Court explained that
pursuant to Section 220(b), a stockholder
has the right, “upon written demand,” toinspect the corporation’s business records“for any proper purpose.” Id. (quoting 8 Del.
C. § 220(b)). If “a stockholder has compliedwith subsection (b) and demand is refusedby the corporation,” a stockholder may thenbring suit “to the extent she has compliedwith subsection (c) of Section 220.” Thecourt stated that subsection (c) “requires
a stockholder seeking records to ‘firstestablish’ … that she ‘has’ complied with thedemand requirement of subsection (b), and… that she ‘is’ a stockholder.” Id. (quoting
8 Del. C. § 220(c)). The Chancery Court
found that “[b]y requiring that a plaintiff
under Section 220 … demonstrate both that[the plaintiff] ‘has’—past tense—compliedwith the demand requirement, and that [theplaintiff] ‘is’—present tense—a stockholder,
the legislature has made clear that only those
who are stockholders at the time of filing havestanding” to bring suit under Section 220.

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

7

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Paul C. Curnin+1-212-455-2519
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Lynn K. Neuner+1-212-455-2696
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Michael J. Garvey+1-212-455-7358
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Michael J. Osnato, Jr.
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michael.osnato@stblaw.com

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