Securities Law Alert
In This Edition:• Supreme Court: Unanimously Upholds State Court Jurisdiction Over Class Actions Alleging Only Claims
Under the Securities Act of 1933
• Supreme Court: Dodd-Frank’s Anti-Retaliation Provisions Apply Only to Employees Who Report
Allegedly Wrongful Activity to the SEC• Fourth Circuit: Once a Company Decides to Speak on a Topic, the Company Has a Duty to Disclose All
Material Information Concerning That Topic• Ninth Circuit: (1) Generalized Allegations of an IPO-Related Motive to Boost Profitability Are Insufficientto Plead Scienter, and (2) Core Operations Theory Is Inapplicable to an Accounting Error Affecting a
Small Division of the Company• M.D. Tenn.: (1) Plaintiffs Cannot Rely on a Prior Dissimilar Event to Allege That Defendants Should Have
Foreseen the Financial Impact of a Later Event, and (2) Allegations of Access to Data, Standing Alone, Are
Insufficient to Plead Scienter• S.D.N.Y.: (1) Plaintiffs Cannot State a Securities Fraud Claim If Cautionary Language Addressed theRisks That Were Allegedly Realized, and (2) Representation of Alignment with International Standards Is
Inactionable• N.D. Cal.: Affiliated Ute Presumption Does Not Apply If the Only Omission Is the Truth That an
Affirmative Misstatement Fails to Disclose• Delaware Supreme Court: Board Was Required to Disclose the Chairman’s Reasons for Abstaining From
Voting on the Sale of the Company
March 2018

Simpson Thacher
offers “expert securities
lawyers” who are “highly
capable of handling a large
breadth of matters at thesame time.”–Chambers USA 2018

Supreme Court: Unanimously
Upholds State Court
Jurisdiction Over Class Actions
Alleging Only Claims Under
the Securities Act of 1933
On March 20, 2018, the Supreme Court
unanimously held that state courts havejurisdiction over class actions alleging only
violations of the Securities Act of 1933 (“the’33 Act”).1 Cyan v. Beaver Cty. Emp. Ret.
1. Simpson Thacher filed a brief in this case on behalf of amici
curiae in support of Petitioners.

Simpson Thacher & Bartlett LLP

Fund, 2018 WL 1384564 (2018) (Kagan, J.).
The Court rejected the issuer’s argument that
the Securities Litigation Uniform Standards
Act (“SLUSA”) passed in 1998 eliminated thejurisdiction of state courts to hear such classactions. In resolving a split among state andfederal courts, the Court likewise rejected a
middle-of-the-road position advanced by the
Solicitor General that such actions should be
removable from state to federal court.

Background
The ’33 Act allows persons who acquire a
registered security to bring suit against anissuer, underwriter, and numerous others formaterially false or misleading statements oromissions made in a registration statement oroffering document. As originally passed, the’33 Act provided for concurrent jurisdiction,
meaning that a plaintiff could bring such aclaim in either state or federal court.
In 1995, Congress passed the Private
Securities Litigation Reform Act (“PSLRA”)
to combat the “nuisance filings, targeting ofdeep-pocket defendants, vexatious discovery
requests, and ‘manipulation by class action
lawyers of the clients whom they purportedly
represent’” that had become a known featureof private securities litigation. Merrill Lynch,
Pierce, Fenner, & Smith v. Dabit, 547 U.S.
71 (2006). The PSLRA instituted significant
changes to class actions brought under federal
securities statutes, including the ’33 Act.
Because these class action reforms generally
applied only to cases brought in federal court,
however, the PSLRA had an unintended
consequence: plaintiffs bringing securities
fraud class actions could avoid the PSLRA’s
new restrictions by bringing their claims instate court, asserting claims under state law
or under the ’33 Act.
Concerned that the intent of the PSLRA wasnot being fully effectuated, Congress passed
SLUSA in 1998. SLUSA’s “core provision” is§ 77p, in which SLUSA divested state courts of
the ability to hear class actions bringing state
law claims involving “covered securities.”
Merrill Lynch, 547 U.S. 71. Generally, asecurity is a “covered security” if it was listed
on a national stock exchange at the time
the alleged misrepresentation, omission, or
deceptive conduct occurred.

§ 77p Does Not Limit State Court
Jurisdiction Over Class Actions
Alleging Only ’33 Act Claims
The question before the Court was “whether§ 77p limits state court jurisdiction over classactions brought under” the ’33 Act.
The Court held that the provision of SLUSA
in dispute does not deprive state courtsof their concurrent jurisdiction over classactions alleging violations of the ’33 Act.
That provision provides that federal district
courts “shall have jurisdiction[,] concurrent
with State and Territorial courts, except asprovided in section 77p of this title withrespect to covered class actions, of all suits inequity and actions at law brought to enforce
any liability or duty created by” the ’33 Act. 15
U.S.C. § 77v(a) (2012) (emphasis added). The
Court termed the italicized language of thisprovision the “except clause,” and the central
dispute in the case was whether the clause’sreference to “covered class actions” pointed
to the definition of that term in § 77p(f)(2). If
it did, Petitioners argued, state courts would
not have jurisdiction over such class actions
brought under the ’33 Act.
The Court rejected Petitioners’ argument for
two reasons. First, if Congress had wanted torefer to § 77p(f)(2)—instead of more broadly
to § 77p, as it did in the except clause—it
would have done so, “just by adding a letter,a number, and a few parentheticals.” Indeed,elsewhere in SLUSA Congress did use apinpoint reference to a subsection of § 77p,
the Court noted. Second, § 77p(f)(2) provides
a definition (of “covered class action”) not
an exception to concurrent jurisdiction,
and Congress is well aware of the difference
between those two functions.

The Court reasoned that, by its terms, § 77p
only prevents certain class actions based onstate law from being heard in state courts(the statute requires that they be removed
to federal court and dismissed), and that
nothing in the text prevents a state court fromhearing class actions based exclusively on
federal law.
Turning from the statutory language, theCourt concluded that even if arguments about
SLUSA’s legislative purpose and history could
overcome a plain reading of the statutory
text, Cyan failed to account for other ways inwhich SLUSA furthers Congress’s objectives.
SLUSA’s preamble sets out the statute’s goalof “limit[ing] the conduct of securities classactions under State law.” In barring classactions brought under state law, SLUSA
2

guarantees that the substantive protectionsof the federal Reform Act will apply to classactions, regardless of whether they proceed
in state or federal court. This objective does
not depend on stripping state courts ofjurisdiction over ’33 Act class actions.
Moreover, the Court wrote, SLUSA’s revisions
to the Securities Exchange Act of 1934 (“the’34 Act”) served Congress’s goal of moving
the majority of securities class actions tofederal court. As with the ’33 Act, SLUSA also
amended the ’34 Act to bar class actions basedon state law, forcing plaintiffs to bring claims
under the ’34 Act. Because federal courts are
vested with exclusive jurisdiction over ’34 Act
claims, those plaintiffs end up in federal, notstate, court. And far more suits are brought
under the ’34 Act, which regulates all tradingof securities, than the ’33 Act, which regulates
only securities offerings.
Finally, the Court rejected the Solicitor
General’s “halfway-house position,” holdingthat SLUSA does not permit the removalof class actions alleging only ’33 Act claims
from state to federal court. Under thatinterpretation, another provision of § 77p in
subsection (c) would permit the removal of’33 Act class actions to federal court if they
allege false statements or deceptive devices
in connection with the purchase of a covered
security, as listed in § 77p(b). But § 77p(b)refers to state-law class actions, which areremovable to federal court (after which they
are to be dismissed), not federal-law classactions asserting ’33 Act claims. The Court
explained that the government’s construction
distorted SLUSA’s text, and statutory
language cannot be ignored “based on an
intuition that Congress must have intended
something broader.”Supreme Court: Dodd-Frank’s
Anti-Retaliation Provisions
Apply Only to Employees Who
Report Allegedly Wrongful
Activity to the SEC
On February 21, 2018, the Supreme Court
unanimously held that the anti-retaliation
protections created by the Dodd-Frank WallStreet Reform and Consumer Protection
Act (“Dodd-Frank Act”) do not apply to an
employee who internally reports allegedly
wrongful activity but fails to report theactivity to the SEC. Digital Realty Trust v.
Somers, 138 S. Ct. 767 (2018) (Ginsburg, J.)(Digital Realty Trust II). The Court’s decision
resolves a split between the Second, Fifth andNinth Circuits.
Section 78u-6 of the Dodd-Frank Act
defines a “whistleblower” as “any individual
who provides . . . information relating toa violation of the securities laws to theCommission, in a manner established, by ruleor regulation, by the Commission.” 15 U.S.C.
§ 78u-6(a)(6) (emphasis added). The same
section creates anti-retaliation provisions for“whistleblowers,” prohibiting employers fromfiring employees who “mak[e] disclosures thatare required or protected under the SarbanesOxley Act of 2002,” among other things. 15
U.S.C. § 78u-6(h)(1)(A)(iii). In 2011, the SEC
promulgated a rule that, for the purposes of
the anti-retaliation protections, interpreted“whistleblower” to include employees whomake only internal disclosures of potentiallywrongful activity. 17 C.F.R. § 240.21F-2(a)(1).
In Somers v. Digital Realty Trust, 850 F.3d
1045 (9th Cir. 2017) (Digital Realty Trust I),2
the Ninth Circuit adopted the Second Circuit’s
2015 conclusion in Berman v. Neo@Ogilvy,
801 F.3d 145 (2d Cir. 2015)3 that the “tension”
between the definition of whistleblower
and the anti-retaliation provisions is “as awhole sufficiently ambiguous to oblige us togive Chevron deference to the reasonableinterpretation of the agency charged withadministering the statute [i.e. the SEC].”
By contrast, in Asadi v. G.E. Energy (USA),720 F.3d 620 (5th Cir. 2013), the Fifth
2. Please click here to read our discussion of the Ninth Circuit’s
decision in Digital Realty Trust I.
3. Please click here to read our discussion of the Second Circuit’s
decision in Berman.

3

Circuit held that the Dodd-Frank Act’s
definition of whistleblower “expressly andunambiguously requires that an individual
provide information to the SEC to qualify asa ‘whistleblower’ for purposes of [the antiretaliation protections].”4 In rejecting theFifth Circuit’s approach, the Ninth Circuit
noted that the SEC regulation is “consistent
with Congress’s overall purpose to protect
those who report violations internally aswell as those who report to the government.”
Digital Realty Trust I, 850 F.3d 1045.
In an opinion authored by Justice Ginsburg,
the Supreme Court unanimously reversed theNinth Circuit’s judgment. The Court began
by noting that the “definition section of thestatute supplies an unequivocal answer” tothe issue of the meaning and reach of the term
“whistleblower” in the Dodd-Frank Act’s antiretaliation provisions. The Court emphasizedthat the definition requires reporting “to theCommission,” and that the statutory text
instructs “that the ‘definition shall apply’ ‘inthis section,’ that is, throughout § 78u-6.”
Digital Realty Trust II, 138 S. Ct. 767(quoting 15 U.S.C. § 78u-6(a)(6)).
The Court further noted that “‘when Congressincludes particular language in one section ofa statute but omits it in another, . . . this Court
presumes that Congress intended a difference
in meaning.’” Id. (quoting Loughrin v.
United States, 134 S. Ct. 2384 (2014)). Title
10 of the Dodd-Frank Act, which created
the Consumer Financial Protection Bureau,features “another whistleblower-protection
provision [that] imposes no requirement that
information be conveyed to a government
agency.” Id. Specifically, it prohibits
discrimination against a “covered employee”
who provides “information to [an] employer,
the Bureau, or any other State, local, orFederal, government authority.” 12 U.S.C.
§ 5567(a)(1). Because Congress placed agovernment-reporting requirement in § 78u-6
but not elsewhere in the Dodd-Frank Act, theCourt concluded that Congress intended thatthe definition of “whistleblower” cover only
individuals who report potentially wrongfulactivity to the SEC.
The Court explained that the “purposeand design” of the Dodd-Frank Act“corroborate[s] [its] comprehension of§ 78u-6(h)’s reporting requirement.” The
4. Please click here to read our discussion of the Fifth Circuit’s
decision in Asadi.

Court cited a Senate Report stating that thecore objective of the Act’s whistleblower
protection scheme is “to motivate people whoknow of securities law violations to tell theSEC.” Id. (quoting S. Rep. No. 111-176, p. 38)(emphasis added by the Court). The Court
found that by creating § 78u-6, Congress“undertook to improve SEC enforcement.”
In a concurring opinion joined by Justices
Alito and Gorsuch, Justice Thomas took
issue with the Court’s reliance on the Senate
Report as evidence of Congressional intent.
Justice Sotomayor, joined by Justice Breyer,
rebutted Justice Thomas’s opinion in her own
concurrence defending the Court’s use of thiskind of legislative history as a method forascertaining the Act’s purpose.
The Court rejected the respondent’s
contention, supported by the UnitedStates, that Congress intended the term
“whistleblower” to retain its “ordinary sense”
rather than the statutory definition. While
conceding that “the plain-text reading of thestatute undoubtedly shields fewer individuals
from retaliation than the alternative profferedby [the respondent] and the Solicitor
General,” the Court was not persuaded that
applying the § 78u-6 definition would “create
obvious incongruities,” “produce anomalous
results,” and “vitiate much of the statute’s
protection[s]” such that a departure from thestatutory definition would be warranted. Id.
Finally, finding that Congress’s primary aim
in creating this section of the Dodd-FrankAct was to incentivize “prompt reporting to
the SEC,” the Court rejected as unpersuasive
arguments that its holding would diminish
the deterrent effects of the Act.

Fourth Circuit: Once a
Company Decides to Speakon a Topic, the Company Has
a Duty to Disclose All Material
Information Concerning
That Topic
On February 22, 2018, the Fourth Circuit
revived a dismissed securities fraud action
alleging that a medical device company failed
to disclose its fraudulent insurance coding
scheme. Singer v. Reali, 883 F.3d 425 (4thCir. 2018) (King, J.). Because the company
chose “to speak about its reimbursement4practices,” the court found plaintiffs
adequately alleged that the company had “aduty to disclose its alleged illegal conduct”
in connection with those practices. The
court further held that plaintiffs sufficiently
pled scienter by alleging that the individual
defendants were personally involved in
executing the alleged scheme. Finally, thecourt found plaintiffs adequately alleged
loss causation based on partial disclosuresconcerning a government subpoena into thecompany’s reimbursement practices.

noted that plaintiffs did not rely on “meregeneric assertions of legal compliance.”
Rather, plaintiffs based their claim on“the [c]ompany’s choice to speak about its
reimbursement practices . . . without tellingthe whole, material truth.”
Finally, the Fourth Circuit held that “general
warnings about the risks of regulatory
scrutiny and litigation” were insufficient tosatisfy the company’s duty to disclose. The
court emphasized that “‘[a] generic warningof a risk will not suffice when undisclosed
facts on the ground would substantiallyaffect a reasonable investor’s calculations ofprobability.’” Id. (quoting Meyer v. Jinkosolar
Holdings Co., 761 F.3d 245 (2d Cir. 2014)).

Allegations That the Individual
Defendants Executed the
Fraudulent Scheme Were Sufficientto Plead Scienter

Duty to Disclose the “Whole
Material Truth” Attaches Oncea Company Chooses to Speak on
an Issue
The Fourth Circuit emphasized that Section
10(b) and Rule 10b-5 “‘do not create anaffirmative duty to disclose any and allmaterial information.’” Id. (quoting Matrixx
Initiatives v. Siracusano, 563 U.S. 27 (2011)).
Rather, “‘companies can control what they
have to disclose . . . by controlling what they
say to the market.’” Id. (quoting Matrixx,
563 U.S. 27). Here, the Fourth Circuit foundthat once the company decided to inform themarket that it was training surgeons on how
to obtain reimbursements for its medical
devices, the company allegedly “possessed—and breached—a duty to disclose thefraudulent reimbursement scheme.”
The Fourth Circuit rejected defendants’argument that there were no allegations
that any court or government agency had
deemed the reimbursement scheme illegal.
The court explained that “the duty to disclose
may extend to uncharged and unadjudicatedillegal conduct.”
The Fourth Circuit also found meritlessdefendants’ contention that the company
had never “specifically asserted it wascomplying with a particular law.” The court

The Fourth Circuit determined that plaintiffs
adequately alleged scienter because thecomplaint was “premised on the proposition
that the [individual defendants] directed
the fraudulent reimbursement scheme,
not that lower-level agents or employees
independently conjured up and carriedout the scheme without the [individual
defendants’] knowledge.”
The court found plaintiffs’ allegation that “thefraudulent reimbursement scheme was known
to the” individual defendants supported “astrong inference that [defendants] intended todeceive the market, or at the very least acted
recklessly,” by failing to disclose the scheme.

Partial Disclosures Concerninga Government Subpoena, Taken
Together, Sufficed to Plead
Loss Causation
Plaintiffs relied on the company’s disclosurein its Form 8-K that the company hadreceived a subpoena from the Department
of Health and Human Services, as well as
an analyst report addressing the subpoena,
to allege loss causation. The Fourth Circuit
found the “Form 8-K and the analyst report
revealed enough facts for the market to finallyrecognize . . . the existence of the [c]ompany’s
fraudulent reimbursement scheme.”
The court emphasized that “neither a single
complete disclosure nor a fact-for-fact
5

disclosure of the relevant truth to the market
is a necessary prerequisite to establishing losscausation.” The court further stated that these“partial disclosures need not precisely identify
the misrepresentation or omission” but “mustat least relate back to the misrepresentationor omission and not to some other negative
information about the company.”

not the same thing as the possibility that
information about fraud will also be reflected”
because “fraud is but one of a panoply of
reasons that a given company could beunder investigation.”

In a Dissenting Opinion, Judge
Agee Expressed His View That
Plaintiffs Failed to Plead Material
Misrepresentations, Scienter orLoss Causation
Judge George S. Agee dissented from the
majority’s opinion on several grounds. Amongother reasons, he opined that “the majority’s
analysis errs in its central assumptionthat the [c]ompany, if speaking about its
reimbursement practices at all, not only had
to characterize those practices fairly, but also
had to further describe them as fraudulent orillegal.” Judge Agee stated that “the majority’sholding creates an inflexible rule that requiresa publicly traded corporation engaged in
ambiguous activity to represent its behavior
as illegal or else risk being the subject of asecurities fraud lawsuit.” In his view, “neither[S]ection 10(b) nor the [Private Securities
Litigation Reform Act] requires that result.”

Ninth Circuit: (1) Generalized
Allegations of an IPORelated Motive to Boost
Profitability Are Insufficientto Plead Scienter, and(2) Core Operations Theory Is
Inapplicable to an Accounting
Error Affecting a Small
Division of the Company

Judge Agee further opined that the majority“incorrectly assume[d] that, because the[c]ompany’s reimbursement framework was
allegedly illegal, the [c]ompany axiomaticallyintended to defraud its investors.” He statedthat “[e]ven if it were fair to infer that the[c]ompany’s officers were aware that the[c]ompany’s reimbursement scheme wasillegal, it is unfair to carry that inference one
step further and conclude that because the[c]ompany acted illegally it therefore also
intended to deceive its investors.” Judge
Agee expressed his view that “[j]ust becausea plaintiff alleges an illegal act does not mean
he has also pled fraud.”

On March 8, 2018, the Ninth Circuit
affirmed dismissal of a securities fraud action
against a solar energy company arising outof an accounting error. Webb v. SolarCity
Corp., 2018 WL 1189422 (9th Cir. 2018)(Smith, Jr., J.). The Ninth Circuit heldthat generalized allegations of a motive toboost a company’s financial performancein the months before and after an IPO are
insufficient to meet the high bar for pleading
scienter. The court further held that plaintiffs
could not rely on the core operations theory
to allege scienter because the accounting
error at issue involved only a small division of
the company.

Finally, Judge Agee stated that plaintiffs
failed to plead any “revelation of the truth”
as required to allege loss causation. He
noted that “the Form 8-K suggested, andthe analyst’s report speculated, only that the[c]ompany was involved in a government
investigation.” Judge Agee observed that“[t]he possibility that some unspecified
negative information may eventually cometo light as a result of the investigation is

The Ninth Circuit began its analysis byemphasizing that the scienter pleading
standard set by the Supreme Court in Tellabs
v. Makor Issues & Rights, 551 U.S. 308(2007) “is not easy to satisfy.” The court
explained that plaintiffs must “plead aninference of scienter that is ‘cogent and at
least as compelling as any opposing inference
one could draw from the facts alleged.’” Id.
(quoting Tellabs, 551 U.S. 308).
6

The Ninth Circuit found plaintiffs’ IPOrelated motive allegations “unhelpful”
towards pleading scienter. The court notedthat plaintiffs’ allegations were neither“specific” nor “particularized,” but instead
spoke to the type of “routine corporate
objectives” that it has rejected in the past. The
court explained that “[s]urely every company
that goes public wants to maximize its
apparent profitability prior to its IPO and tomaintain a high share price afterward in order
to finance acquisitions and expand.”The Ninth Circuit also rejected plaintiffs’
effort to rely on the core operations doctrine
to plead defendants’ knowledge of theaccounting error. While plaintiffs allegedthat defendants “had a hands-on style andgeneral accounting acumen,” there were no
allegations that defendants “were involvedin accounting decisions as minute as thecalculation” at issue. The court further foundplaintiffs alleged no facts supporting an
inference that it would have been “absurd”
for defendants to have missed the impactof the accounting error. The court notedthat the division affected by the accounting
error accounted for “a relatively minor
portion of the company’s overall business.”
Moreover, the court observed that the error“was so subtle that it appears that even thecompany’s specialized accounting divisionand professional auditors missed it.” Finally,
the court found it significant that theaccounting error “only misstated the degreeof the company’s unprofitability.” The court
determined that these factors, taken together,precluded it “from holding that the falsityof the erroneous financials was necessarily‘immediately obvious’” to defendants.
Based on a holistic consideration of plaintiffs’scienter allegations, the Ninth Circuit
concluded that plaintiffs’ “narrative of fraud
is simply not as plausible as a nonfraudulent

alternative.”5 The court found that at
most, plaintiffs “paint[ed] a picture of amismanaged organization in need of closer
financial oversight that made a minute error
at a critical stage in its development.”

M.D. Tenn.: (1) Plaintiffs
Cannot Rely on a Prior
Dissimilar Event to Allege
That Defendants Should
Have Foreseen the Financial
Impact of a Later Event, and(2) Allegations of Access toData, Standing Alone, Are
Insufficient to Plead Scienter
On March 8, 2018, the Middle Districtof Tennessee dismissed in its entirety asecurities fraud action alleging that a lowcost retailer misrepresented the business
impact of the expiration of government
benefits received by certain of its customers.
Iron Worker Local Union No. 405 v. Dollar
General Corp., Nos. 3:17 CV 63, 3:17 CV 275,
and 3:17 CV 276 (M.D. Tenn. 2018) (Zouhary,J.).6 The court rejected plaintiffs’ contention
that defendants should have known that thebenefits expiration “would have the same,foreseeable impact” as a “very different”
benefits reduction several years prior. The
court further held that plaintiffs could notplead scienter based on defendants’ accessto data that allegedly would have shown thefinancial impact of the benefits expiration,
absent allegations that the data had been
analyzed and reported to senior management.

Plaintiffs Failed to Allege That
Defendants Should Have Predicted
and Disclosed the Negative Impactof the Benefits Expiration
Plaintiffs claimed that a number of statements
made by the company’s CEO in March and
May 2016 were misleading in light of an
5. The Ninth Circuit rejected plaintiffs’ contention that the
district court had erred by considering each scienter allegationindividually before conducting a holistic analysis. While
the Ninth Circuit noted that it has recognized the “potential
pitfalls” of such an approach, the court stated that “such ananalytical process is permitted under [its] precedents.”
6. Simpson Thacher represents the defendants in this action.

7

expiration of benefits for certain recipientsof the federal government’s Supplemental
Nutritional Assistance Program (SNAP)
earlier that year (the “2016 Expiration”).
Plaintiffs contended that the CEO should haveaddressed the actual and expected financial
impact of the 2016 Expiration because an
across-the-board reduction in SNAP benefits
in 2013 (the “2013 Reduction”) had an
adverse effect on the company’s sales.
The court held that even though the 2016
Expiration may have ultimately resulted in
reduced sales, plaintiffs did not adequately
allege that the company “could or shouldhave predicted that result” based on the2013 Reduction. The court pointed outthat plaintiffs themselves “acknowledge[d]that the 2013 Reduction was very different
from the 2016 Expiration.” The court foundplaintiffs alleged “no facts supporting an
inference that [the company] should haveforecasted the same result in 2016 as in 2013.”

Plaintiffs Could Not Plead Scienter
Based Solely on Defendants’ Accessto Real-Time Financial Data
During an analyst call on May 26, 2016, theCEO indicated that the company’s “coreconsumer” was “probably about the same”
as she was “coming out of Q4.” Plaintiffs
contended that this statement was materiallymisleading because the 2016 Expiration had
already begun to impact sales by that point.
Plaintiffs alleged that the CEO knew or shouldhave known of the sales decline because thecompany employed “Moneyball”-style data
analytics, which allegedly provided the CEO
with “access to critical sales information at all
times.”
Plaintiffs attempted to bolster this claim bypointing to the CEO’s August 2016 statementthat “you could see it immediately in thenumbers.” The CEO made this statement on
the same day that the company issued a press

release reporting lower-than-expected second
quarter sales that the company attributedin part to “a reduction in both SNAP
participation rates and benefit levels.”
The court found plaintiffs’ allegations
insufficient to plead scienter. Although
plaintiffs claimed that the CEO had accessto real-time financial data, plaintiffs did“not allege that anyone in the [c]ompany
actually analyzed or reported the impact ofthe 2016 Expiration to senior management
before [the May 2016] call.” The court also
held that plaintiffs could not rely on the
CEO’s August 2016 statement to support aninference of scienter. The court explainedthat “a statement made with the benefit ofhindsight does not plausibly suggest either[the CEO or the company] was actually awareof the negative trend at the time of the May 26
conference call.”CEO’s Statements Were Not
Misleading When Consideredin Context
Plaintiffs challenged as misleading a numberof the CEO’s statements concerning thecompany’s “core customer.” The court foundplaintiffs’ claims rested on the “unwarranted
factual inference[ ]” that the company’s “corecustomers” were those who lost benefits inthe 2016 Expiration. The court explainedthat “those individuals made up only a small
portion (about 2%) of all SNAP participants,[and] a correspondingly smaller percentage of[the company’s] ‘core customers.’”
The court found that the other alleged
misstatements were either inactionablecorporate optimism, or “inherently forward
looking.” The court emphasized thatwhen considering whether a statement
is misleading, “[c]ontext matters.” Thecourt explained that “[i]t is [p]laintiffs’
responsibility to connect the dots,” which thecourt found plaintiffs here failed to do.

8S.D.N.Y.: (1) Plaintiffs Cannot
State a Securities Fraud
Claim If Cautionary Language
Addressed the Risks That
Were Allegedly Realized,and (2) Representation of
Alignment with International
Standards Is Inactionable

Here, plaintiffs alleged that defendants
failed to disclose “that an investigation into[d]efendants’ business might reveal thatthey rigged bids for public projects in Brazil,
causing the market value of the [notes atissue] to fall precipitously.” The court heldthat plaintiffs’ “claims fail as a matter of law”
because “[d]efendants adequately disclosed
the ongoing investigations into their bidrigging scheme.” The court noted that theOffering Memorandum stated as follows:

On March 8, 2018, the Southern District of
New York dismissed without leave to amend
a securities fraud action alleging that a groupof Brazilian entities failed to disclose thatthe value of certain notes could fall if themarket discovered that defendants were
allegedly involved in an illegal bid-rigging
scheme. Banco Safra S.A.—Cayman Islands
Branch v. Andrade Gutierrez Int’l, 2018 WL
1276847 (S.D.N.Y. 2018) (Furman, J.).7 The
court found “no reasonable investor could
have been misled about the nature of therisk” because the Offering Memorandum
included cautionary language that “addressed
the relevant risks directly.” The court further
held that a representation concerning
the alignment of business practices withinternational standards was too aspirationaland generalized to support a securities
fraud claim.

[W]e are currently subject to claims
alleging irregularities in certain bidding
processes and public contracts for which
we were awarded construction works. . . .
In case decisions are issued against us, we
could suffer a material adverse effect.

Defendants Disclosed the Specific
Risks That Allegedly Materialized
The court explained that “[w]here, as here,
the alleged deceptive act is a failure todisclose uncharged criminal conduct, thecritical consideration is whether the allegedomissions are sufficiently connected todefendants’ existing disclosures to makethose public statements misleading.” Courtsin the Second Circuit “have found a sufficientconnection in three circumstances: (1) whena corporation puts the reasons for its success
at issue, but fails to disclose that a material
source of its success is the use of improperor illegal business practices; (2) when adefendant makes a statement that can beunderstood, by a reasonable investor, to denythat the illegal conduct is occurring; and(3) when a defendant states an opinion that,absent disclosure, misleads investors aboutmaterial facts underlying that belief.”

7. Simpson Thacher represents Andrade Gutierrez Internationaland Andrade Gutierrez Engenharia in this matter.

The court found “[t]his cautionary language
addressed the very risks that [p]laintiffs claim
were later realized.”
The court also rejected plaintiffs’ contention
that “[d]efendants’ disclosure was deceptively
broad.” The court explained that “where
there is disclosure that is broad enough tocover a specific risk, . . . the disclosure is not
misleading simply because it fails to discuss
the specific risk.” The court found similarly
meritless plaintiffs’ claim that “[d]efendants
were required in the Offering Memorandum
to estimate potential fines and penalties towhich [the entity offering the notes] could be
subjected.” The court observed that plaintiffs“cite[d] no authority for the proposition thatsuch a specific (and usually unknowable)
disclosure is required.”Statements Concerning Alignment
with International Standards Were
Too Aspirational to Support a
Securities Fraud Claim
Plaintiffs also challenged as misleading astatement in the Offering Memorandum that
one of the defendants “aligns its corporate
practices to standards issued by international
entities, such as the International FinanceCorporation” and other lenders that provide
funding for the company’s projects. The court
noted that plaintiffs did not cite to the specificstandards themselves, nor did plaintiffs
allege that many of the lenders had even“established relevant standards.” The court
concluded that a representation concerningalignment with such standards was “bothtoo general and too aspirational to support a
securities-fraud claim.”
9

N.D. Cal.: Affiliated Ute
Presumption Does Not Apply
If the Only Omission Is theTruth That an Affirmative
Misstatement Fails to Disclose
On March 2, 2018, the Northern Districtof California held that the presumption ofreliance for omission-based Section 10(b)claims established in Affiliated Ute Citizensof Utah v. United States, 406 U.S. 128 (1972)
does not apply if the alleged “omission is of
the truth that certain affirmative statements
allegedly misrepresent.” In re Volkswagen“Clean Diesel” Mktg., Sales Practices, andProd. Liab. Litig., 2018 WL 1142884 (N.D.
Cal. 2018) (Breyer, J.). In so holding, thecourt expressly followed the Second Circuit’s
recent decision in Waggoner v. Barclays, 875
F.3d 79 (2d Cir. 2017).8
The Northern District of California had
previously determined that the Affliated Ute
presumption applied because plaintiffs’ “casecan be characterized as one that primarily
alleges omissions.” In re Volkswagen “Clean
Diesel” Mktg., Sales Practices and Prod. Liab.
Litig., 2017 WL 3058563 (N.D. Cal. 2017).
Defendants moved for reconsideration basedon the Second Circuit’s intervening decisionin Waggoner. The Second Circuit held thatplaintiffs cannot rely on the Affiliated Ute
presumption if their claims “are primarily
based on misstatements.” Waggoner, 875
F.3d 79. The Second Circuit underscoredthat “[t]he Affiliated Ute presumption does
not apply to earlier misrepresentations mademore misleading by subsequent omissions,or to what has been described as ‘halftruths,’ nor does it apply to misstatements
whose only omission is the truth that thestatement misrepresents.”
The Northern District of California foundthe Second Circuit’s reasoning “persuasive.”
The court noted that “[t]he Ninth Circuit has
also recognized a need to ‘maintain[ ] thewell-established distinction, for purposesof the Affiliated Ute presumption, between
omission claims, on the one hand, andmisrepresentation and manipulation
claims, on the other.’” Id. (quoting Desai v.
Deutsche Bank Sec., 573 F.3d 931 (9th Cir.
2009)). The Northern District of California
8. Please click here to read our discussion of the Second Circuit’s
decision in Waggoner.

“conclude[d] that whether the Affiliated Ute
presumption of reliance is applicable is a
decision that should be based on whether
the presumption’s purpose—of avoiding
the need to prove a speculative negative—isimplicated.”On reconsideration, the court held thatplaintiffs could not rely on the AffiliatedUte presumption because their claims were“predicated on affirmative statements”
concerning research and development(“R&D”) and regulatory risk, which plaintiffs
challenged as misleading because defendants
did not disclose alleged emissions fraud. The
court explained that plaintiffs either “reliedon the R&D and regulatory-risk statements. . . or they did not.” The court held that if
plaintiffs “did not, they should not be able toovercome this shortfall by characterizing theirclaims as primarily alleging omissions.”

Delaware Supreme Court:
Board Was Required toDisclose the Chairman’s
Reasons for Abstaining Froma Board Vote on the Sale of theCompany
On February 20, 2018, the Delaware Supreme
Court reversed dismissal of a shareholder
action that alleged that the board of directors
failed to disclose the reasons why thechairman of the board, who was also thecompany’s founder, had abstained froma board vote on the sale of the company.
Appel v. Berkman, 2018 WL 947893 (Del.
2018) (Strine, C. J.).9 The court rejected
defendants’ contention that “the reasons for adissenting or abstaining board member’s votecan never be material.” The court explainedthat “when, as here, a board expresses its
reasons for voting in favor of a transaction,
the contrary view of an individual board
member may be material to a stockholder
9. The company was sold pursuant to a two-step merger under
Section 251(h) of the Delaware General Code. Because theChancery Court found that the shareholders’ acceptanceof the first-step tender offer was fully-informed, the court
determined that the business judgment rule governed thetransaction. Appel v. Berkman, 2017 WL 6016571 (Del. Ch.
Jul. 13, 2017) (citing Corwin v. KKR Financial Holdings,
125 A.3d 304 (Del. 2015) (fully informed shareholder votecleanses a transaction); In re Volcano Corp. S’holder Litig.,
143 A.3d 727 (Del. Ch. 2016) (Corwin rule applies where
fully-informed stockholders tender their shares in a two-stepmerger under 8 Del. C. § 251(h))).
10

wrestling with whether to accept the board’s
recommendation.”In the case before it, the chairman had
expressed his view that it was not the righttime to sell the company. Defendants argued
that the chairman’s belief “was just his
opinion,” rather than a “material fact that
requires disclosure.” The Delaware Supreme
Court found this “distinction between opinion
and fact” to be “of little relevance, because
proxy statements seeking approval of majortransactions are filled with statements of fact
about opinions, in the sense that they recount
why fiduciaries and their advisors took certain
actions and why they believed the transaction
was in the company’s best interest.” The court
stated that stockholders are “entitled to give
weight to their fiduciaries’ opinions about
important business matters.”
The Delaware Supreme Court emphasizedthat its “decision in no way implies that thereason for a particular director’s dissent orabsention will always be material.” Rather,

the court reaffirmed the “contextual
approach” for determining whether
disclosure “would materially affect the mixof information, or whether the disclosure isrequired to make sure that other disclosures
do not present a materially misleading
picture.”Here, the court found that it is “no common
thing” “[f]or a [c]hairman to abstain fromvoting on the sale of the business he founded.”
The court noted that the disclosures included
so many reasons why the other directors
voted in favor of the transaction that thechairman’s reasons for abstaining from thevote would “catch a reasonable stockholder’sattention.” The court found “the founder and[c]hairman’s views regarding the wisdomof selling the company were ones thatreasonable stockholders would have foundmaterial in deciding whether to vote for themerger or seek appraisal, and the failure todisclose them rendered the facts that weredisclosed misleadingly incomplete.”

This edition of the
Securities Law Alert was edited byAlexis S. Coll-Veryacoll-very@stblaw.com / +1-650-251-5201,
Peter E. Kazanoffpkazanoff@stblaw.com / +1-212-455-3525,
Deborah L. Stein
dstein@stblaw.com / +1-310-407-7525,
and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

11

New York

Los Angeles

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

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

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

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

Mark J. Stein+1-212-455-2310
mstein@stblaw.com

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

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

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

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

Paul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

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

Palo Alto

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
Alexis S. Coll-Very+1-650-251-5201
acoll-very@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.
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

The contents of this publication are for informational purposes only. Neither this publication nor the
lawyers 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.
12SimpsonThacherWorldwide

UNITED STATESEUROPE

SOUTH AMERICANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

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

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

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

ASIA

Beijing
3901 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999
Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Seoul
25th Floor, West Tower
Mirae Asset Center 1
26 Eulji-ro 5-gil, Jung-gu
Seoul 100-210
Korea+82-2-6030-3800
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
13