Securities Law Alert
In This Edition:• Supreme Court: Considers Whether Unnamed Class Members With Tolled and Timely Claims Can
Bring a New Class Action After Expiration of the Otherwise Applicable Limitations Period• Supreme Court: Considers Whether SEC Administrative Law Judges Are Subject to the Appointments
Clause• First Circuit: Failure to Disclose the Details of Adverse Regulatory Guidance Cannot Alone Support anInference of Scienter Where Defendants Provided Warnings in Broader Terms• Second Circuit: Aspirational Statements Concerning a Company’s Values Are Not Actionable• Ninth Circuit: Misstatement Claims Under Section 14(e) of the Exchange Act Require Only Proof of
Negligence, Not Scienter• Southern District of New York: Companies Have No Duty to Admit “Uncharged, UnadjudicatedWrongdoing”
April 2018

SimpsonThacher is “a go-to
for underwriters on a
range of high-value matters,with particular strength inconnection with the class actions
and derivative suits that follow
high-profile public offerings.”–Chambers USA 2018

Simpson Thacher & Bartlett LLPSupreme Court: Considers
Whether Unnamed Class
Members With Tolled andTimely Claims Can Bringa New Class Action After
Expiration of the Otherwise
Applicable Limitations Period
On March 26, 2018, the Supreme Court
heard oral arguments in China Agritech, Inc.
v. Resh, No. 17-432. At issue is whether anabsent class member whose individual claims
are timely as a result of the tolling doctrine
established in American Pipe & Construction
Co. v. Utah, 414 U.S. 538 (1974), may file a
new class action after the expiration of theotherwise applicable limitations period.

Background
Under existing American Pipe Supreme
Court doctrine, a pending class action tolls
the applicable statute of limitations, allowing
absent would-be class members to intervene
in a pending case or file new individualsuits after the denial of class certification
when the statute of limitations period would
have otherwise expired. The moment classcertification is denied or vacated, or the caseis dismissed without a class being certified,
the statute resumes running as to thepreviously asserted members of the class andthey have whatever time remained to themwhen the prior class suit was filed within
which to pursue an individual claim.
In Resh v. China Agritech, 857 F.3d 994(9th Cir. 2017), the Ninth Circuit held thatthe American Pipe tolling doctrine permits
plaintiffs to bring a new class action after
the expiration of the statute of limitations if
they were unnamed plaintiffs in a timely-filed
putative class action, even if class certification
was denied in the prior action on substantive
grounds and the new action asserts similarclass claims.1 In so holding, the Ninth
Circuit joined with the Sixth and Seventh
Circuits in finding that the American Pipetolling doctrine applies to subsequent classactions. In contrast, the First, Second, Fifth,and Eleventh Circuits limit the American
Pipe tolling doctrine to claims by individual
plaintiffs. The Third and Eighth Circuits
have taken an intermediate position, only
allowing subsequent class actions when classcertification was denied for reasons that wereunrelated to the validity of the class, such aswhere the denial was based solely on leadplaintiffs’ deficiencies as class representatives.
In China Agritech, the Court will determine
whether the American Pipe tolling doctrine
extends to subsequent class action suits,
permitting so-called “stacking” of successiveclass actions in order to continue thetoll otherwise ended by denial of classcertification in a prior class action.

Oral Argument Highlights
The oral argument focused heavily on
the traditional requirements of tolling as
an equitable remedy, which include thatplaintiffs must demonstrate “diligence,”
meaning that they have taken action to defend
their own legal rights, and some extraordinary
circumstance. Counsel for China Agritech(“Petitioner”) argued that the Court permitted
equitable tolling for individual plaintiffs in
American Pipe because: (1) after the denial
1. Please click here to read our discussion of the Ninth Circuit’s
decision in Resh.

of class certification, plaintiffs show thediligence required for tolling when they bring
their own individual claims in court; and(2) the enforcement of the statute oflimitations would undermine the point ofRule 23 by encouraging plaintiffs to bring
duplicative independent claims during apending class action litigation instead of
relying on the class action to represent theirinterests. Petitioner’s counsel argued thatneither of those reasons are applicable to thetolling of class action claims because:(1) the absent class action members have notshown the diligence required by equity as
they are still absent and are not taking action
to protect their individual rights even afterclass certification is denied; and (2) after
the denial of class certification, there is no“extraordinary circumstance,” as the concern
about plaintiffs filing redundant protective
individual claims that detract from the valueof a pending class action is no longer relevant.
Chief Justice Roberts questioned Petitioner’s
counsel on how his approach was consistent
with Rule 23, noting that it seemed like hewas “creating an exception to the rule. If you
just read [Rule 23] on its face, the statute oflimitations hasn’t run because of American
Pipe . . . so why shouldn’t that rule beavailable . . . ?”Justice Kagan acknowledged that she was“a little bit skeptical” of Petitioner’s
arguments. She noted that the Court reached
its decision in American Pipe for two reasons:(1) plaintiffs are sufficiently diligent when
they rely on a pending class action torepresent their interests; and (2) the policies
behind Rule 23 indicate that the Court should
encourage class actions over individual
actions in general. She noted that, in thiscase, “the exact same thing is true. Diligenceis shown in the same way by reliance on theclass, and, once again, even after the denialof a single motion for class certification, Rule23 would indicate that we don’t want to havea million individual suits but instead want toencourage a class.”
Counsel for William Schoenke, Heroca
Holding, and Ninella Beheer (“Respondents”)
agreed with Justice Kagan, claiming that:(1) class members in this case had shown
diligence by relying on the tolling doctrine inAmerican Pipe; and (2) the purpose of Rule23 would be best served by allowing classactions to toll the statute of limitations for2other class action claims because it avoids
the potential of having an overabundance ofindividual claims filed by plaintiffs after thedenial of class certification and before theexpiration of the statute of limitations. He
argued that the “extraordinary circumstance”
here is the desire to enforce the principles
behind Rule 23 and to “incentivize people notto bring duplicative claims.”
Justice Sotomayor pressed the parties on
their view of the Third and Eighth Circuits’
approach, under which the application of thetolling doctrine depends on the reason forthe denial of class certification. Both parties
distanced themselves from this rule.
The Justices considered small value claims
that would not be worthwhile to bring as
individual actions. Justice Kagan observedthat the reason for Rule 23 “is that weunderstand that with respect to somecategory of claims, we’re not going to havethem individually or it will be so ridiculous
if we have them individually that we would
prefer the class action device.” JusticeGorsuch commented that “encourag[ing]more protective filings . . . would solve theproblem, wouldn’t it? We wouldn’t have tocreate these extraordinary rules in extending
American Pipe in new ways; we’d justcreate a new incentive structure that would
ensure that there are backup class actions
available. . . . [W]hat’s wrong with that?”
Justice Gorsuch showed concern about theperpetual filing of class actions, asking if
plaintiffs could “stack them forever, so thattry, try again, and the statute of limitations
never really has any force in these cases.”
Respondents’ counsel responded that comity
will be a “powerful mechanism” to limit serial
motions for class certification.
The Court will issue its decision in China
Agritech later this term.

Supreme Court: Considers
Whether SEC Administrative
Law Judges Are Subject to the
Appointments Clause
On April 23, 2018, the Supreme Court
heard oral arguments in Lucia v. SEC,
No. 17-130. The question before the Court
is whether the administrative law judges(“ALJs”) for the SEC’s in-house courts
qualify as either “Officers of the UnitedStates” or “inferior officers” subject to the
Appointments Clause of the United States
Constitution, or employees not subject to the
Appointments Clause.

Background
The Appointments Clause states that the
President “shall nominate, and by and with
the Advice and Consent of the Senate, shallappoint . . . Officers of the United States.” U.S.
Const. art. II, § 2, cl. 2. The Appointments
Clause further provides that “Congress may
by Law vest the Appointment of such inferior
Officers, as they think proper, in the President
alone, in the Courts of Law, or in the Heads
of Departments.”
In Raymond J. Lucia Cos. v. SEC, 832
F.3d 277 (D.C. Cir. 2016), the D.C. Circuit
held that SEC ALJs are not “Officers of
the United States” or “inferior officers”
within the meaning of the Appointments
Clause. The court held that the key inquiry
for determining the applicability of the
Appointments Clause is whether SEC ALJs
“issue final decisions” of the SEC. The D.C.
Circuit found it significant that the SEC has adiscretionary right to review the action of any
ALJ as it sees fit.2
However, in Bandimere v. SEC, 844 F.3d
1168 (10th Cir. 2016), the Tenth Circuit reliedon the Supreme Court’s decision in Freytagv. Commissioner of Internal Revenue, 501
U.S. 868 (1991), to hold that SEC ALJs are“inferior officers” who must be appointed inconformity with the Appointments Clause.
The Tenth Circuit rejected final decisionmaking power as the key criterion forassessing whether the Appointments Clauseapplies. The Tenth Circuit determined that
2. Pursuant to 17 C.F.R. § 201.411, the SEC has the authority toreview an ALJ’s decision de novo. If no review is sought orordered, the SEC will issue an order directing enforcement of
the ALJ’s decision. 17 C.F.R. § 201.360(d). The ALJ’s initialdecision becomes final only upon issuance of the SEC’s order.
3

“SEC ALJs exercise significant discretionin performing ‘important functions’commensurate with” the functions performedby the special trial judges of the federal
Tax Court deemed to be “inferior officers”
in Freytag.

binding decisions.” Counsel for Respondent
contended that there is “no meaningful
difference between this case and Freytag.”
Justice Breyer stated that he was “fairly
certain . . . that the Constitution does notinhibit the creation of . . . an adjudicatorily
merit-based system of hearing examiners.”

Oral Argument Highlights

Court-appointed amicus curiae argued, in
support of the D.C. Circuit’s decision and the
SEC’s original position, that “an officer of theUnited States is someone with the power tobind the government or private parties in thename of his own office.” He further statedthat “someone whose acts have no binding
effect without the sanction of an officer is nothimself an officer of the United States.”

Counsel for Raymond J. Lucia and Raymond
J. Lucia Companies (“Petitioners”) began byarguing that SEC ALJs are “inferior officers”
for purposes of the Appointments Clausebecause they “have been invested with thesovereign power to preside over formal
adjudications” and they have “independence
in their decisional functions, their hearing
functions, and their evidentiary functions.”
Chief Justice Roberts countered that “anydecisions of the ALJs in every case aren’t
operative until the Commission issues anorder of finality.” Justice Sotomayor joinedin, emphasizing that an SEC ALJ’s decision“doesn’t become final except by the actions of
the SEC officers.” She later questioned, “whyisn’t that the line? Whether the ALJ’s word is
final or not?”Justice Kagan questioned whether the
problem of the SEC ALJ’s alleged bias in thecase involving the Petitioner would be solved
by “the greater political accountability thatcomes from the Appointments Clause.” She
asked, “wouldn’t putting those decisionmakers even closer to the political body
only exacerbate the problem that you’re
complaining of?” She later observed that“[t]here are different ways to interfere withdecisional independence,” and one way is tobe “the person who gets to decide who getsthe job or not.” She explained that holding
SEC ALJs subject to the Appointments Clause
would “in some manner tie the adjudicator
more closely to the political system.”Counsel for the SEC (“Respondent”), arguingin support of Petitioners’ position,3 asserted
that SEC ALJs “adjudicate disputes that
impose liability and sanctions on private
individuals, and they can and do issue
3. Under the Obama administration, the federal government
took the position that SEC ALJs are only employees,
rather than “Officers” or “inferior officers” subject to the
Appointments Clause. But in November 2017, the federal
government reversed course and took the view that
ALJs exercise significant authority and are subject to the
Appointments Clause. Counsel for Respondent therefore
argued in favor of the position advanced by the Petitioners.
The Court appointed counsel to argue in support of the D.C.
Circuit’s decision and the original position advanced by the
SEC.

Chief Justice Roberts asked how the casebefore the Court was different than Freytag.
Court-appointed amicus curiae explainedthat the special trial judges in Freytag also
had contempt power. Justice Kagan took
issue with this distinction, and noted that
the Freytag Court did not even mention thespecial trial judges’ contempt power until thesecond half of the opinion. She noted that it
was “hard to get around” the “commonalities”
between SEC ALJs and the tax judges in
Freytag.
Chief Justice Roberts expressed concernthat the process for appointing SEC ALJs
“operates as insulation from the politicalaccountability that the drafters of theConstitution intended.” He observed that
the SEC could disclaim responsibility for thedecisions of its ALJs. Court-appointed amicus
curiae disagreed, and stated that the SEC “isgoing to be held 100 percent accountable forevery single decision, whether it’s initiallymade by an ALJ or not” because the statutory
structure “makes clear that the decision isalways the decision of the Commission.”
Court-appointed amicus curiae emphasizedthat the test he proposed “turns on a legal
authority to either bind the government,
make the government do particular things, orbind private parties.” Justice Alito noted that
this test is “potentially very broad and alsoquite vague.” He observed that “an enormous
number of executive branch officials have thepower to bind the government in one way
or another.”
Justice Kagan found that there was “a gooddeal to be said” for this proposed test, but shequestioned the basis for the proposed test.
4She noted, “I don’t really see what the sourceof this test is.” Court-appointed amicus curiae
responded that the test was based in parton the long-established distinction between
whether the holder of an office is “authorized
to act in the name of their own office” or “onlyin the name of somebody else’s office.” Heexplained that without his test, “every AUSA
is going to be considered an officer, eventhough the U.S. Attorney is going to be held
100 percent accountable for every decision in
his or her office.”
In response to the arguments advanced by
Court-appointed amicus curiae, counsel for
Petitioners stated that the “binding authority”
test applies only to principal officers, but not
to inferior officers. Moreover, he emphasizedthat the SEC has only a discretionary right toreview SEC ALJ decisions that is frequently
not exercised.
The Court will issue a decision in the Lucia
case later this term.

First Circuit: Failure to
Disclose the Details of Adverse
Regulatory Guidance Cannot
Alone Support an Inferenceof Scienter Where Defendants
Provided Warnings in Broader
Terms
On April 4, 2018, the First Circuit affirmed
dismissal of a securities fraud action
alleging that a pharmaceutical company
misled investors about the timing of its
expedited application for approval of anew pharmaceutical. Kader v. Sarepta
Therapeutics, 887 F.3d 48 (1st Cir. 2018)(Torruella, J.). The court held that plaintiffs
failed to allege scienter because defendants
broadly disclosed the FDA’s concerns, andthere were no particularized facts supporting
plaintiffs’ allegation that the company wasdependent on offerings to fund its operations.
To plead scienter, plaintiffs pointed to thecompany’s alleged failure to disclose the
FDA’s request that the company obtain an
independent review of its pharmaceutical
data. The First Circuit found the statements
at issue “severely weaken[ed] any inferenceof scienter” because the CEO both “reminded
investors that the FDA was looking for further

review” while offering “no assurance that[the company] would accede to the typeof review that the FDA sought.” The First
Circuit explained that “providing warnings toinvestors, or otherwise disclosing potential
risks, erodes inferences of scienter.”
The First Circuit further held that it could not“reasonably infer scienter from [the CEO’s]
failure to elaborate . . . on any difference
between a review by the FDA and” anindependent review. The court reasoned that“an arguable misrepresentation provides byitself less support for an inference of scienter
than does a clear falsehood.”
The First Circuit also rejected plaintiffs’
effort to plead scienter based on the CEO’s
failure to disclose that the company was
not complying with the FDA’s request forindependent review. The court observedthat the FDA did not inform the company
that independent review was “a mandatory
prerequisite” for expedited filing. Moreover,the First Circuit emphasized that defendants’failure to “divulge the details of interim‘regulatory back-and-forth’ with the FDA . . .
alone cannot support an inference of scienter. . . when the defendants do provide warnings
in broader terms.” The court reasoned that“[t]here must be some room for give and takebetween a regulated entity and its regulator.”
Finally, the First Circuit found meritlessplaintiffs’ contention that the company
was “dependent upon offerings to fund its
operations” because it was “in a race for FDA
approval” and was “generating no significant
revenue.” The court explained that it has “seta high bar for arguments of this sort.” To
plead scienter based on a motive to boost thecompany’s stock price, plaintiffs must allege“something more than the ever-present desire
to improve results, such as allegations that thevery survival of the company was on the line.”
In the case before it, the First Circuit foundthe complaint “bereft of allegations that [thecompany] was financially on the ropes, or that
it would shutter its doors unless it padded
earnings by deceiving investors.” The court
recognized that the company’s initial public
offering may have “generated revenue thatproved useful to [the company] in its race
for FDA approval, so as to secure the firstmover advantage.” However, the First Circuit
held that this “alone cannot bear the weightof an inference of scienter that is at least ascompelling as any other.”5Second Circuit: Aspirational
Statements Concerning a
Company’s Values Are Not
Actionable
On April 24, 2018, the Second Circuit affirmed
dismissal of a securities fraud action alleging
misstatements concerning the values of thecompany’s online marketplace.4 Altayyar
v. Etsy, 2018 WL 1918519 (2d Cir. 2018)(summary order) (Altayyar II). The Second
Circuit found “the purported misstatements”
were all “vague aspirational statements” that
could not give rise to a securities fraud claim.
Plaintiffs sought to recover losses that
followed an analyst report indicating thatcertain of the items sold on the company’s
online marketplace were either counterfeit
or infringed on existing trademarks
and copyrights. Plaintiffs claimed that a
number of the company’s values-related
statements misrepresented the company’s“trustworthiness.” Altayyar v. Etsy, 242 F.
Supp. 3d 161 (E.D.N.Y. 2017). For example,
plaintiffs pointed to statements describing
the company as “a mindful, transparent andhumane business” with “an authentic, trusted
marketplace that embodies [the company’s]values-based culture.”
The district court found these statements
were “precisely the type of puffery that
the Second Circuit has held to be noncognizable.” The court reasoned that “[w]ords
like ‘mindful,’ ‘humane,’ ‘genuine,’ and‘authentic’ are not quantifiable or factual;they are subject to interpretation, withinreason, and are statements of opinion.” Thecourt explained that “‘a sincere statement ofpure opinion is not an untrue statement ofmaterial fact, regardless whether an investor
can ultimately prove the belief wrong.’” Id.
(quoting Omnicare v. Laborers Dist. Council
Const. Indus. Pension Fund, 135 S. Ct. 1318
(2015)). The district court determined thateven if “plaintiffs’ allegations might showthat [the company’s] compliance practices
were imperfect,” plaintiffs did not “establishthat the challenged values statements
were objectively false or disbelieved when[the company] made them.”
On appeal, the Second Circuit found the
district court “correctly dismissed” plaintiffs’
4. Simpson Thacher represents the underwriters of Etsy’s initialpublic offering in this matter.

claims for failure to “allege actionable
misstatements or omissions.” Altayyar II,
2018 WL 1918519.

Ninth Circuit: Misstatement
Claims Under Section 14(e)of the Exchange Act Require
Only Proof of Negligence, Not
Scienter
On March 30, 2018, the Ninth Circuit
held that the first clause of Rule 14(e),which prohibits material misstatements inconnection with tender offers, requires only
proof of negligence, rather than scienter.5
Varjabedian v. Emulex Corp., 2018 WL
1882905 (9th Cir. 2018) (Marguia, J.). Fiveother circuits to consider this question haverelied on similarities between the first clauseof Rule 14(e) and Rule 10b-5(b)6 to hold thata scienter requirement applies to Rule 14(e)claims. The Ninth Circuit departed fromthese decisions based on its determinationthat “important distinctions exist between
Rule 10b-5 and Section 14(e)” that “strongly
militate against importing the scienter
requirement from the context of Rule 10b-5 toSection 14(e).”The prevailing view that the first clauseof Section 14(e) requires proof of scienter
dates back to the Second Circuit’s decisionin Chris-Craft Industries v. Piper Aircraft
Corp., 480 F.2d 341 (2d Cir. 1973), in which
the court stated that it would “follow the
principles developed under Rule 10b-5
regarding the elements of [Section 14(e)]5. Rule 14(e), titled Untrue statement of material fact oromission of fact with respect to tender offer, provides:
It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state a material
fact necessary in order to make the statements made, inthe light of the circumstances under which they are made,not misleading, or to engage in any fraudulent, deceptive,
or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any
solicitation of security holders in opposition to or in favor ofany such offer, request, or invitation.
15 U.S.C. §78n(e). Rule 14(e) was added as an amendment to the
Securities Exchange Act of 1934 pursuant to the Williams Act.
6. Rule 10b-5(b), titled Employment of manipulative anddeceptive devices, provides in relevant part:
It shall be unlawful for any person, directly or indirectly. . . [t]o make any untrue statement of a material fact or toomit to state a material fact necessary in order to make thestatements made, in the light of the circumstances underwhich they were made, not misleading . . . in connection
with the purchase or sale of any security.
6

violations.” A year later, the Fifth Circuit
agreed with the Second Circuit and held thatthe first clause of Rule 14(e), like Rule 10b-5,
requires proof of scienter. Smallwood v. Pearl
Brewing Co., 489 F.2d 579 (5th Cir. 1974).
Three other circuits have since reached thesame conclusion.7

The Ninth Circuit disagreed with Chris-Craft
and Smallwood, and the rulings of othercircuits following those decisions, for several
reasons. First, the Ninth Circuit explainedthat Rule 10b-5(b)’s scienter requirement
is based not on the text of the rule itself but
on the language of Section 10(b), pursuant
to which Rule 10b-5 was promulgated. The
Ninth Circuit noted that in Ernst & Ernst
v. Hochfelder, 425 U.S. 185 (1976), theSupreme Court “acknowledged that thewording of Rule 10b-5(b) could reasonably beread as imposing a scienter or a negligencestandard.” Varjabedian, 2018 WL 1882905.
However, as the Ninth Circuit explained, theErnst & Ernst Court ultimately concluded that
Rule 10b-5(b) “requires a showing of scienter
because it is a regulation promulgated under
Section 10(b) of the Exchange Act, whichallows the SEC to regulate only ‘manipulative
or deceptive device[s].’” The Ninth Circuit
found “[t]his rationale regarding Rule 10b-5
does not apply to Section 14(e), which is astatute, not an SEC Rule.”
The Ninth Circuit also explained that “Section
14(e) differs fundamentally from Section
10(b)” because the SEC may regulate nonfraudulent conduct under Section 14(e). The
Ninth Circuit observed that “[i]f the SEC canprohibit acts themselves not fraudulent under
Section 14(e), then it would be somewhat
inconsistent to conclude that Section 14(e)itself reaches only fraudulent conduct
requiring scienter.”
7. See In re Digital Island Sec. Litig., 357 F.3d 322 (3d Cir.
2004); SEC v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004);
Adams v. Standard Knitting Mills, 623 F.2d 422 (6th Cir.
1980).

Second, the Ninth Circuit found it significant
that in Aaron v. SEC, 446 U.S. 680 (1980),
the Supreme Court held that Section 17(a)(2)of the Securities Act of 1933—which is nearly
identical to the first clause of Rule 14(e)—does
not require a showing of scienter.8 The Ninth
Circuit noted that the two provisions both“govern disclosures and statements made inconnection with an offer of securities, albeit
in different contexts: Section 17(a) applies
to initial public offerings while Section 14(e)applies to tender offers.” The Ninth Circuit
explained that “statutes dealing with similar
subjects should be interpreted harmoniously.”
Finally, the Ninth Circuit found that thelegislative history of the Williams Act,
pursuant to which Section 14(e) was enacted,
also “supports a negligence standard.” Thecourt explained that “[t]he legislative history
suggests that the Williams Act places moreemphasis on the quality of information
shareholders receive in a tender offer than on
the state of mind harbored by those issuing atender offer.”
The Ninth Circuit concluded that “because
the text of the first clause of Section 14(e)is devoid of any suggestion that scienteris required, . . . the first clause of Section
14(e) requires a showing of only negligence,not scienter.”Southern District of New
York: Companies Have No
Duty to Admit “Uncharged,
Unadjudicated Wrongdoing”
On March 30, 2018, the Southern Districtof New York dismissed with prejudice asecurities fraud action brought against an
aerospace conglomerate following disclosuresof SEC and DOJ investigations into potential
Foreign Corrupt Practices Act (“FCPA”)
violations that predated the class period.
Emps. Ret. Sys. of the City of Providence v.
Embraer S.A., 2018 WL 1725574 (S.D.N.Y.
2018) (Berman, J.). The court held defendants
were under no obligation to admit that the
8. Section 17(a)(2) provides in relevant part:
It shall be unlawful for any person in the offer or sale of any
securities . . . to obtain money or property by means of any
untrue statement of a material fact or any omission to statea material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading.
15 U.S.C. § 77q(a)(2).
7

company had violated the FCPA before
the company had been charged and while
the investigations were ongoing. The courtemphasized that “companies do not have aduty to disclose uncharged, unadjudicatedwrongdoing.”

Disclosure of Pending
Investigations and Their Potential
Adverse Consequences Is Sufficient
to Satisfy the Securities Laws
The Embraer court held the company had“complied with its disclosure obligations”
by informing investors of pending SEC and
DOJ investigations, as well as the possible
penalties and fines that could result. The
court rejected plaintiffs’ contention that thecompany was “duty bound to alert investors
to the certainty of the fraud” itself. The
Embraer court underscored that “disclosure
is not a rite of confession.”
The court explained that in City of Pontiac
Policemen’s and Firemen’s Retirement
System. v. UBS AG, 752 F.3d 173 (2d Cir.
2014), the Second Circuit found that an
investment bank had satisfied its disclosure
requirements under the securities laws
by revealing that the bank was underinvestigation and could face significant
adverse consequences. The Second
Circuit rejected plaintiffs’ contention that
“defendants were required to disclose that[the bank] was, in fact, [allegedly] engaged in
an ongoing . . . scheme.” City of Pontiac, 752
F.3d 173.
The Embraer court also found persuasive
the court’s recent decision in In re Banco
Bradesco S.A. Securities Litigation, 277 F.
Supp. 3d 600 (S.D.N.Y. 2017). There, thecourt held that a company had no obligation
to inform investors that it was allegedly“engaged in an unlawful bribery scheme”
where it had disclosed both the existenceof legal and administrative proceedings
concerning that alleged scheme, as well as thepotential impact of those proceedings on thecompany’s finances and reputation.

Plaintiffs Cannot State a
Securities Fraud Claim Basedon the Disclosure of Accurate
Financial Data
The Embraer court found meritless plaintiffs’
contention that the company was “obligatedto disclose that some unstated portionof its sales or income was derived fromcontracts related to the FCPA violations.”
The court explained that “the allegation thata corporation properly reported income thatis alleged to have been, in part, improperly
obtained is insufficient to impose Section
10(b) liability.” 2018 WL 1725574 (quoting
In re Sanofi Sec. Litig., 155 F. Supp. 3d 386(S.D.N.Y. 2016)).
Because plaintiffs did “not dispute that[the company’s] financial statements were(literally) accurate,” the court held that the“the statements or omissions concerning[the company’s] financial statements are notactionable.” The court stated that “a violationof federal securities laws cannot be premised
upon a company’s disclosure of accurate
historical data.” Id. (quoting Sanofi, 155 F.
Supp. 3d 386).

A Code of Ethics Cannot Give Riseto a Securities Fraud Claim
The court further held that plaintiffs could notstate a claim based on the company’s alleged
failure to comply with its code of ethics, which
the court found “inherently aspirational.” Thecourt noted that “it cannot be that every timea violation of that code occurs, [the company]
will be liable under federal [securities] laws.”

Plaintiffs Failed to Allege theCompany’s Opinion Concerning
Reserves Was Not Sincerely Held
Plaintiffs also challenged the company’s
opinion, based on advice of counsel, that
there was “no basis for estimating reserves
or quantifying any possible contingency”
in connection with the DOJ and SEC
investigations of the alleged FCPA violations.
In plaintiffs’ view, the company could havequantified reserves by reference to the scopeof the alleged bribery scheme.
The Embraer court held that plaintiffs
could not state a claim merely by alleging
that the company’s opinion was wrong.
Here, plaintiffs did “not plead that thisstatement was (insincerely) not truthful orthat management (and its outside counsel)
did not believe what they were stating
publicly.” Plaintiffs simply “disagree[d]with the opinion.” The court explained that“‘[t]he securities laws do not allow investors
to second-guess inherently subjective and8uncertain assessments.’” Id. (quoting In re
Weight Watchers Int’l Sec. Litig., 2016 WL
2757760 (S.D.N.Y. May 11, 2016)).

Plaintiffs’ Internal Control Claims
Were Deficient in Light of the“Temporal Disconnect” Between
the Alleged FCPA Violations and theClass Period
Finally, the Embraer court found plaintiffs’
claims concerning the adequacy of thecompany’s internal controls insufficiently
particularized to survive a motion to dismiss.
The court explained that a plaintiff asserting
an internal control-based securities fraudclaim must “allege specific facts concerning
the purportedly deficient internal controls,
including how they were deficient, when andwhy.”
Here, the court found plaintiffs pled only
generalized allegations concerning thecompany’s internal controls and thenattempted to link those allegations to current
employees’ knowledge of, or participation in,alleged FCPA violations that occurred before
the commencement of the class period. The
court agreed with defendants that there was a“‘temporal disconnect’ between bribery events[that] occurred well before the [c]lass periodand [the] alleged faulty internal controls.”
The Embraer court distinguished In rePetrobras Sec. Litig., 116 F. Supp. 3d368 (S.D.N.Y. 2015), in which the court“apparently did not require the plaintiffs topresent more detailed information about
the defendant’s internal controls.” Id. The
Embraer court explained that in Petrobras,“both the statements and the alleged
corruption occurred during the class period.”
Here, however, the alleged bribery scheme“occurred five years prior to the [c]lass[p]eriod.” The Embraer court found plaintiffs’
allegations “temporally and logicallyinsufficient” to give rise to an internal
controls-based claim.

This edition of the
Securities Law Alert was edited by
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
George S. Wang
gwang@stblaw.com / +1-212-455-2228,
and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

9

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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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Chet A. Kronenberg+1-310-407-7557
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Michael J. Garvey+1-212-455-7358
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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

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