Securities Law Alert
In This Edition:• Second Circuit: Reverses the Dismissal of a Securities Fraud Action Where the Allegations of a Material
Omission Raised a Strong Inference of Recklessness• Second Circuit: Revives a Securities Fraud Action Where Plaintiffs Adequately Pled Falsity and Loss
Causation• Second Circuit: Plaintiffs Are Not Entitled to Multiple Opportunities to Amend Their Complaint• Second and Eighth Circuits: Courts Reach Differing Conclusions on Whether Plaintiffs Can State an
ERISA Duty of Prudence Claim by Alleging That Delaying an Inevitable Disclosure Results in Greater
Stock Price Harm
• Seventh Circuit: Vacates Class Certification Where the District Court Failed to Consider Evidence
Demonstrating the Absence of Price Impact• Seventh Circuit: Where a Statement in a Tender Offer Was “Subject to Change,” Updating That Statement
Cannot Give Rise to Securities Fraud Liability
July/August 2020

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Second Circuit: Reverses theDismissal of a Securities Fraud
Action Where the Allegationsof a Material Omission
Raised a Strong Inference ofRecklessness
On August 3, 2020, the Second Circuit
revived a putative securities fraud classaction alleging that a real estate investment
trust (“REIT”) “misled investors by failing todisclose a $15 million working capital loan
it made to one of its major tenants” in May
2017, which the tenant then used to makepartial rent payments to the REIT. Setzer
v. Omega Healthcare Investors, 2020 WL
4431902 (2d Cir. 2020) (Wesley, J.). The
Second Circuit found plaintiffs adequately
alleged that the REIT’s “decision not todisclose the [l]oan . . . in the context of its

disclosures regarding [the tenant’s] financial
health” was “a sufficiently extreme departurefrom the standards of ordinary care to satisfy
the [Private Securities Litigation Reform
Act’s] requirement for showing recklessness.”

BackgroundIn the first quarter of 2017, the REIT
disclosed that the tenant had fallen behindon its rent payments. Analysts subsequently“raised concerns regarding [the tenant’s]
ability to pay rent.” During a July 27, 2017conference call with analysts, the REIT’s chief
operating officer (“COO”) expressed optimismthat the tenant’s “efforts will result in steadily
improving margins and [will] eventually
return to its former profitability.” In its
second-quarter 10-Q, the REIT stated that thetenant “has been showing signs of operational
improvement and is currently making partial
monthly rent payments.” Plaintiffs contended
that this statement “implied that [the tenant]had been making rent payments from its own
operating income, when at least part of thoserent payments was funded by the undisclosed
loan [the REIT] had extended to [the tenant]several months earlier.” Plaintiffs further
alleged that the REIT’s “repeated failure todisclose the existence of the [l]oan was part ofa surreptitious scheme to avoid disclosing to
the market both the gravity of [the tenant’s]
financial woes and the likely impact on [theREIT’s] financial results.”
The district court found plaintiffs adequately
alleged the materiality of the REIT’s failure
to disclose the loan. However, the district
court held that plaintiffs failed to plead
scienter because there were no allegations ofa GAAP violation, and the REIT otherwise
disclosed the tenant’s financial difficulties.
Plaintiffs appealed.

Plaintiffs Adequately Alleged
That Defendants’ Failure to
Disclose the Loan Was an
Extreme Departure From theStandards of Ordinary Care
The Second Circuit began by noting that“[p]laintiffs’ theory of scienter is based
primarily on recklessness.” The court
explained that in order to state a claim thata material omission was reckless, plaintiffs
must “allege a clear duty to disclose” andmust further “allege facts supporting a strong
inference of conscious recklessness—i.e., astate of mind approximating actual intent,
and not merely a heightened form ofnegligence.”
The Second Circuit held that the REIT “wasduty-bound to disclose that its loan was thesource of [the tenant’s] rent payments.” Thecourt found that “[b]y putting [the tenant’s]
rental payments in play, [d]efendants wererequired to speak accurately and completely.”
The court determined that “[t]he omission
concealed the extent of [the tenant’s] solvency
problems: [the tenant] could not pay rent
without borrowing from its landlord.”that result[ed] from their conduct.” Thecourt noted that the tenant “represented
seven percent of [the REIT’s] investment
portfolio” and “was a significant source ofincome through rental payments.” The court
found that because the tenant’s “performanceplainly impacted [the REIT’s] overall financial
health,” the REIT “had to know that revealing
the full extent of [the tenant’s] performance
problems would have been troubling news
to its investors.” The court concluded that“[t]he facts as alleged create a compelling
inference that [d]efendants made a conscious
decision to not disclose the [l]oan in orderto understate the extent of [the tenant’s]
financial difficulties,” particularly because“multiple analysts ho[n]ed in on [thetenant’s] rental payments being key to [theREIT’s] prospects.”
The Second Circuit found it irrelevant forscienter purposes that plaintiffs did notallege “a GAAP violation or other accounting
irregularity.” The court explained that“[w]hile loaning money to a tenant to pay its
rent and then expressing optimism about thattenant’s performance because it is making
partial monthly payments may not violate
GAAP, it is still seriously misleading under
the facts as alleged here.” The Second Circuitalso noted that defendants’ “disclosures
regarding [the tenant’s] financial difficulties”
did not “alter [its] conclusion.” To thecontrary, the court found “those disclosures
support a finding of recklessness here as theystrongly suggest that [d]efendants sought touse [the tenant’s] partial rental payments toexpress optimism and underrepresent theextent of those very problems.”

The Second Circuit further found that “theallegations in the [c]omplaint raise a strong
inference that [d]efendants acted, at thevery least, recklessly in choosing to disclose
incomplete and misleading information
regarding [the tenant].” The court focused
its analysis on “[d]efendants’ degree ofknowledge and the seriousness of the impact2

Alleging a Duty to Disclose,Standing Alone, Is Insufficient toPlead Recklessness in the Context
of an Omission
The Second Circuit observed that “thedistinction between materiality analysis andthe recklessness prong of scienter warrants
some attention” in the context of material
omissions. The court explained that the“recklessness analysis resembles [the]materiality analysis” in such cases because“[a] defendant’s duty to disclose often
depends on the importance of the omitted
information under the circumstances.” The
Second Circuit clarified that “where, as here,
the duty to disclose is based on a requirement
to disclose material facts necessary in orderto make the statements made, in the lightof the circumstances under which they were
made, not misleading, and the recklessness
inquiry requires assessing the seriousnessof the defendant’s departure from its duty
to disclose, . . . the seriousness required toadequately allege recklessness must typicallygo beyond the materiality showing required toallege a duty to disclose.”

Second Circuit: Revives a
Securities Fraud Action Where
Plaintiffs Adequately Pled
Falsity and Loss Causation
On July 13, 2020, the Second Circuit reversed
the dismissal of putative securities fraud classaction claims based on its determinationthat plaintiffs adequately alleged falsity
and loss causation as to certain challenged
statements. Abramson v. NewLink Genetics
Corp., 965 F.3d 165 (2d Cir. 2020) (Walker,
J.). However, the Second Circuit affirmed thedismissal of claims challenging defendants’
optimistic statements regarding the results ofa clinical trial because the court found thosestatements were “unactionable puffery.”Background
In September 2013, during a presentation
for investors at a biotech conference, thecompany’s President & Chief Medical Officer(“CMO”) described the 24.1 month survival
rate for participants in the company’s Phase
2 trial as “remarkable.” He stated that “allthe major studies” show that “survival rates

come between 15 to 19, 20 months. That’sit.” Several months later, in March 2014, ananalyst asked how the company’s statisticalassumptions would be impacted if it assumed
that the control group lived for 24 or 25
months. The President & CMO responded
that the company did not have “any reason tobelieve that median survival [rate] for thesepatients will be more than [the] low 20s.”
Plaintiffs alleged that the September 2013
and March 2014 statements were misleading
because numerous significant studies “showedsurvival rates ranging from 25 months to 43
months.” But the district court “determinedthat the September and March statements
were unactionable statements of opinion ordisagreements with how [d]efendants choseto interpret the historical data, rather thanfalsifiable statements of facts.”
Plaintiffs also challenged a statement in thecompany’s September 17, 2013 press release
representing that the company had “met” its“accrual goal of 722 subjects” for its Phase
3 trial. At the conclusion of that trial, “thecontrol group had a higher survival rate than
the test group by three months.” Plaintiffs
presented confidential witness allegations
that the company had enrolled ineligible
individuals, and contended that this led to
the failure of the Phase 3 clinical trial, which
in turn caused plaintiffs’ financial losses. The
district court held that plaintiffs adequately
alleged falsity with respect to the enrollmentrelated statement, but found plaintiffs failed
to plead loss causation. Plaintiffs appealed.

Failure to Disclose Studies
Showing Longer Baseline Survival
Rates Rendered Defendants’Statements Misleading
The Second Circuit explained that Rule10b-5 “renders both statements of fact
and those of opinion actionable when suchstatements would be misleading without
the contextualization of material facts.” Thecourt noted that prior to the Supreme Court’s
decision in Omnicare v. Laborers Dist.
Council Industry Pension Fund, 575 U.S.
175 (2015), the Second Circuit “recognizedsparingly few circumstances in which astatement of opinion would be actionable.”
The court observed that “Omnicare rejected
the proposition that there can be no liability
based on a statement of opinion unless the3speaker disbelieved the opinion at the time it
was made.”1
The Second Circuit explained that after
Omnicare, plaintiffs can state a securities
fraud claim by “alleg[ing] that a statement of
opinion, without providing critical context,
implied facts that can be proven false.”2 The
court pointed out that liability for such astatement turns on what a reasonable investor
would expect in light of the context in which
the statement was made. The court also madeit clear that “a statement of opinion does not
imply false information to a reasonable investor
simply because there is some fact cutting theother way that the speaker omitted.”
With respect to the September 2013statement, the court noted that the President& CMO did not “couch his representation ofsurvival rates with prefatory language like‘I believe’ or ‘In my estimation.’” He instead
presented a “categorical proposition,” and“cited the results of ‘all the major American
studies’” in support of his statement. The
court found it significant that the statement
was made “at an important conference
for biotech investors.” Given the context,
the court determined that “[i]nvestors inattendance reasonably would not haveinterpreted his statement as a baseless,off-the-cuff judgment; instead, they would
have credited his statement as researched
and intentional, part of a well-prepared
professional presentation.” The Second
Circuit held that the statement could lead“a reasonable investor” to believe that“no credible studies have shown resectedpancreatic cancer patients to have survival
rates higher than 20 months.” The court
1. Please click here to read our discussion of the Supreme Court’s
decision in Omnicare.
2. Plaintiffs can also “allege that a statement of opinion contained
one or more embedded factual statements that can be provenfalse.” Abramson, 965 F.3d 165.

found the March 2014 statement similarly
misleading, “[b]oth because of its posture
as a response to a specific question and its
categorical nature.”

Plaintiffs Adequately Pled Loss
Causation by Alleging That the
Stock Price Dropped Due to theClinical Trial’s Failure, Which
Happened Because the Company
Enrolled Ineligible Individuals
The Second Circuit explained that in order“[t]o establish loss causation, [p]laintiffs
must demonstrate that the subject of thefraudulent statement or omission was
the cause of the actual loss suffered.”Plaintiffs alleged, inter alia, that defendants“materially misrepresented . . . the designof their Phase 3 clinical trial, and that thesemisrepresentations caused [p]laintiffs’
financial losses.” Specifically, plaintiffs
contended that “the failure of the Phase 3 trial
was attributable to the concealed” enrollmentof ineligible individuals, “and that the failure
therefore constructively disclosed the fraud.”
The Second Circuit found this theory of losscausation “persuasive,” reasoning that “asufficient number of improper enrollments
would naturally and predictably affect a trial’s
statistical integrity.” The court concluded
that plaintiffs’ theory “suffices” to plead losscausation “because, at this early pleading
stage, we do not require conclusive proofof the causal link between the fraud and[p]laintiffs’ loss.”Second Circuit: Plaintiffs
Are Not Entitled to Multiple
Opportunities to Amend Their
Complaint
On August 12, 2020, the Second Circuit
determined that the district court “applied thecorrect legal standard” and “acted well within
its discretion” in denying plaintiffs’ motion
for leave to file a third amended complaint.
Metzler Inv. Gmbh v. Chipotle Mexican Grill,2020 WL 4644799 (2d Cir. 2020) (Sack, J.).
The Second Circuit found it significant
that “the district court issued a thoroughopinion that identified defects” in the firstamended complaint, yet “plaintiffs failed
to cure such deficiencies in their [s]econd[a]mended [c]omplaint.” The Second Circuit
4

acknowledged that “a plaintiff afforded
attempt after attempt . . . might one day
succeed in stating a claim,” but determinedthat “the federal rules and policies behindthem do not permit such limitless possibility.”
The Second Circuit held that the district
court “correctly analyzed” plaintiffs’ motion
under Federal Rules of Civil Procedure 59(e)and 60(b), and explained that “[i]t is wellestablished that a party seeking to file anamended complaint post-judgment mustfirst have the judgment vacated or set asidepursuant to Fed. R. Civ. P. 59(e) or 60(b).”3
The Second Circuit found “no authority” forplaintiffs’ contention that the district court
should have “consider[ed] only the standard
that governs pre-trial motions for leave toamend a pleading pursuant to Federal Ruleof Civil Procedure 15(a)(2), which statesthat before trial, . . . [t]he court should
freely give leave when justice so requires.”
The Second Circuit acknowledged that “[i]nthe post-judgment context,” it has “given
due regard to the liberal spirit of Rule 15 byensuring plaintiffs at least one opportunity
to replead.” But the court emphasizedthat it has not “given sole regard to Rule15” because “[d]oing so would allow theliberal amendment policy of Rule 15(a) toswallow the philosophy favoring finality of
judgments whole.”
The Second Circuit also found no basis forplaintiffs’ argument that the provisionsof Rules 59(e) and 60(b) governing newly
discovered evidence are “specific to actions
in which judgment was entered following
trial” and do not apply to “dismissal on a
Rule 12(b)(6) motion.” The court explainedthat “[n]ewly discovered evidence must be offacts that existed at the time of trial or otherdispositive proceeding.” The court held that“[t]he newly discovered evidence provisionsof Rules 59(e) and 60(b) thus apply to theplaintiffs’ post-judgment motion for leave toamend because it was made following grantof a motion to dismiss which, like a trial, is a‘dispositive proceeding.’” The court concluded
that plaintiffs’ “challenge to the legal standard
applied by the district court thus fails.”
3. The Second Circuit noted that a court may vacate a judgment
pursuant to Rule 59(e) “only when the movant identifies
an intervening change of controlling law, the availability of
new evidence, or the need to correct a clear error or prevent
manifest injustice.” The court also recognized that Rule 60(b)permits a court to “relieve a party from a final judgment” incertain limited cases, including “when there are extraordinary
circumstances justifying relief” and “when the judgment may
work an extreme and undue hardship.”Second and Eighth Circuits:
Courts Reach Differing
Conclusions on Whether
Plaintiffs Can State an ERISA
Duty of Prudence Claim byAlleging That Delaying an
Inevitable Disclosure Resultsin Greater Stock Price Harm
Earlier this year, the Supreme Court vacated a
Second Circuit decision holding that plaintiffs
satisfied Fifth Third’s “more harm than good”
pleading standard for an inside informationbased ERISA claim against the fiduciaries ofan employee stock ownership plan (“ESOP”)4by alleging that delaying an inevitabledisclosure of an alleged fraud results ingreater stock price harm. Ret. Plans Comm.
of IBM v. Jander, 140 S.Ct. 592 (2020).5 On
June 22, 2020, the Second Circuit reinstated
its earlier decision and remanded forproceedings consistent with its initial opinion.
Jander v. Ret. Plans Comm. of IBM, 962 F.3d
85 (2d Cir. 2020) (per curiam).
Several weeks later, on July 28, 2020, theEighth Circuit rejected the theory of ERISA
liability endorsed by the Second Circuit.
Dormani v. Target Corp., 2020 WL 4289987(8th Cir. 2020) (Kobes, J.). Plaintiffs
claimed that the ESOP fiduciaries shouldhave disclosed the company’s supply-chain
management problems. Plaintiffs argued
that “no prudent fiduciary could conclude
disclosure would harm the Plan because
4. In Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014),
the Supreme Court held that in order “[t]o state a claim forbreach of the duty of prudence” against ESOP fiduciaries“on the basis of inside information, a plaintiff must plausibly
allege an alternative action that the defendant could havetaken that would have been consistent with the securities laws
and that a prudent fiduciary in the same circumstances would
not have viewed as more likely to harm the fund than to helpit.” Please click here to read our discussion of the Supreme
Court’s decision in Fifth Third.
5. The Court explained that “[t]he question presented” waswhether Fifth Third’s “‘more harm than good’ pleading
standard can be satisfied by generalized allegations thatthe harm of an inevitable disclosure of an alleged fraud
generally increases over time.” 140 S.Ct. 592. The Court
noted that “[i]n their briefing on the merits, however,the petitioners . . . and the Government . . . focused theirarguments primarily upon other matters[,]” which the Second
Circuit did not address. The Court determined that the Second
Circuit should have an opportunity to consider, in the first
instance, questions raised concerning whether ERISA imposes
any duty on ESOP fiduciaries to act on inside information,
and whether claims for failure to disclose inside information
are compatible with the federal securities laws. Please click
here to read our discussion of the Supreme Court’s decision in
Jander.
5

an efficient stock market provided with full
information would not overreact to disclosure
and profit seeking arbitrageurs would haveacted quickly to bring the price back to fairvalue.” In essence, plaintiffs “assume[d]some drop in stock price was inevitable andthe earlier the fiduciaries disclosed [thecompany’s] problems and the earlier the drop
took place, the less time the Plan would spend
purchasing artificially inflated [company]
stock.” The Eighth Circuit found “this chainof reasoning . . . uncertain” and determinedthat “a reasonably prudent fiduciary lacking
the Plan participants’ faith in arbitrageurs
could still believe disclosure was the moredangerous of the two routes.”

Seventh Circuit: VacatesClass Certification Where
the District Court Failed
to Consider Evidence
Demonstrating the Absence ofPrice Impact
On July 16, 2020, the Seventh Circuit vacatedan order granting class certification in asecurities fraud action where the district
court admitted, but did not consider, “theevidence that defendants offered to defeat
the Basic presumption, an expert opinion
that the alleged misrepresentations had no
impact on the stock price.” In re: Allstate
Corp. Sec. Litig., 966 F.3d 595 (7th Cir. 2020)(Hamilton, J.).6 The Seventh Circuit foundthe district court erred in “conclud[ing] thatthe issue was tied so closely to the merits
that [the court] should not decide it on classcertification.” The Seventh Circuit heldthat under the Supreme Court’s decision inHalliburton Co. v. Erica P. John Fund, 573
U.S. 258 (2014) (Halliburton II), “the district
court must decide at the class [certification]
stage the price impact issue posed by the
defendants’ price impact evidence andplaintiffs’ rebuttal” and “may not defer thatquestion for the merits.”7

Background

The Eighth Circuit also rejected plaintiffs’
contention that “the fiduciaries violated the
duty of loyalty in administering the Plan”
by simultaneously serving as officers ordirectors of the company. The court explainedthat “ERISA authorizes fiduciaries to wear
different hats.” The Eighth Circuit held that“[m]ere officer or director status does notcreate an imputed breach of the duty ofloyalty simply because an officer or director
has an understandable interest in positive
performance of company stock.”
The Eighth Circuit further held that plaintiffs
could not state a duty of loyalty claim byalleging that the fiduciaries made misleadingstatements to Plan participants. The court
stated that “[l]itigants cannot use the duty ofloyalty to circumvent the demanding [Fifth
Third] standard for duty of prudence claims.”

In 2013, an auto insurance company“announced a new growth strategy[of] . . . attracting more new customers by‘softening’ its underwriting standards.”
The company “disclosed that this approach
could cause ‘some pressure’ on its auto
claims ‘frequency’” because “new andpotentially riskier customers might file
more auto claims.” Plaintiffs alleged thatwhen claims frequency increased after the
implementation of this strategy, the company“misled the market by falsely attributing
the increases to other factors such as
6. Under the Basic presumption of reliance, “an investor’s
reliance on any public material misrepresentations . . . may bepresumed for purposes of a Rule 10b-5 action” based on theassumption that “the market price of shares traded on welldeveloped markets reflects all publicly available information
and, hence, any material misrepresentations.” Basic v.
Levinson, 485 U.S. 224 (1988). The Basic Court specificallyheld that “[a]ny showing that severs the link between the
alleged misrepresentation and either the price received (orpaid) by the plaintiff, or his decision to trade at a fair market
price, will be sufficient to rebut the presumption of reliance.”
7. Please click here to read our discussion of the Supreme Court’s
decision in Halliburton II.
6higher-than-usual precipitation and miles
driven[.]” Approximately two years later,
the company “announced that the higher
claims rates it had experienced for threequarters had been fueled at least in part by
the company’s recent growth strategy[.]”The company’s “stock price dropped bymore than 10 percent” immediately after
this announcement.

Defendants presented the report of an expert
who “found no statistically significant increasein [the company’s] stock price following
any of the alleged misrepresentations[.]”Defendants’ expert also stated that “thealleged misrepresentations could not [i.e.,
as a matter of logic] have had price impact
because [the company’s] growth strategy,
and the fact that the [c]ompany’s growthstrategy was expected to cause higher
claims frequencies, was publicly disclosed”
and, therefore, “would have already been
impounded into [the company’s] stock price.”
Plaintiffs contended that defendants’ expert
report presented “a truth-on-the-market
defense forbidden” for consideration at theclass certification stage under the Supreme
Court’s decision in Amgen v. Connecticut
Ret. Plans and Trust Funds, 568 U.S. 455(2013).8 Plaintiffs argued that the company“had at best disclosed only potential risks,
but . . . chose not to inform the market thatthese dangers were in fact being realized.”
The district court agreed with plaintiffs andconcluded that resolving the question ofprice impact in the case before it “essentiallyand improperly would require [it] to decidedisputed material issues of fact underlying
plaintiff’s case” at the class certification
8. Please click here to read our discussion of the Supreme Court’s
decision in Amgen.

stage. In re Allstate Corp. Sec. Litig., 2019
WL 1512268 (N.D. Ill. Mar. 26, 2019).
Defendants appealed.

District Court Erred in Declining
to Resolve the Question of Price
ImpactAt the outset of its analysis, the Seventh
Circuit acknowledged that recent Supreme
Court decisions governing “[e]vidence
supporting or refuting the Basic presumptionof reliance . . . pose a difficult challenge at
the class certification stage.” The Seventh
Circuit explained that under Erica P. John
Fund v. Halliburton Co., 563 U.S. 804 (2011)(Halliburton I), “[a] district court deciding
whether to certify a plaintiff class may not use
the evidence to decide loss causation[.]”9 And
under Amgen, a district court “may not use
the same evidence to decide materiality[,]” orto credit a “truth-on-the-market defense.” Yetunder Halliburton II, “a court must consider
the same evidence if the defense offers it toshow the absence of transaction causation,
also known as price impact.” The Seventh
Circuit observed that “[t]he crucial challenge
for the district court is to decide only theissues the Supreme Court has said should be
decided for class certification while resisting
the temptation to draw what may be obvious
inferences for the closely related issues
that must be left for the merits, including
materiality and loss causation, as required byHalliburton I and Amgen.”
The Seventh Circuit “agree[d] with the
district court that the [company’s] priceimpact theory looks very much like theprohibited defenses of no materiality or ‘truth
on the market.’” But the Seventh Circuit“conclude[d] that the close similarity does
not allow a district court to avoid a priceimpact defense at the class certification
stage.” The Seventh Circuit explained thatin Halliburton II, the Supreme Court “madeclear that the defense is entitled to offer
evidence of a lack of price impact at the classcertification stage[.]” The Seventh Circuit
found “[t]he district court here made a legal
error by embracing Amgen at the expenseof Halliburton II—a tempting way of morecleanly managing price impact evidence—
rather than engaging in the messier but
required process of simultaneously complying
9. Please click here to read our discussion of the Supreme Court’s
decision in Halliburton I.
7

with the instructions from the Supreme Court
in both cases.” The Seventh Circuit “therefore
vacate[d] the class certification and orderand remand[ed] for further consideration ofevidence relevant to price impact.”10

Seventh Circuit Provides Guidance
for the District Court on theConsideration of Price Impact
The Seventh Circuit provided the district
court with detailed guidance for remand.
First, the court addressed “the scope of
discovery available at class certification.”
The Seventh Circuit stated that “[g]iven thesignificant and growing overlap between
the evidence at stake at the certification andmerits stages, district courts may well choose
not to bifurcate discovery at all in putative
fraud-on-the-market securities class actions.”
Second, the Seventh Circuit agreed with
the Second Circuit’s decision in Waggonerv. Barclays, 875 F.3d 79 (2d Cir. 2017),
that “once plaintiffs have made a prima
facie showing [that the Basic presumption
applies,] the burden of persuasion, notproduction, to rebut the Basic presumption
shifts to defendants.”11 The Seventh Circuit
explained that “Basic said that ‘any showingthat severs the link’ would be sufficient to
rebut the presumption, . . . not that mere
production of evidence would defeat thepresumption.”
Third, the Seventh Circuit cautioned that“price reaction (the simple movement of theprice in response to a given statement) is
quite different from the legal concept of priceimpact” because “the price might have fallen
even more if the full extent of the bad news
were known.” The court explained that “thebest way to determine the impact of a false
statement is to observe what happens when
the truth is finally disclosed and use that towork backward, on the assumption that the
lie’s positive effect on the share price is equal
to the additive inverse of the truth’s negative
effect.” The Seventh Circuit instructed that“[o]n remand, the district court may take
into account expert findings with regard
to . . . whether the stock price responds when
10. The Seventh Circuit expressly declined to hold that classcertification should have been denied, and explained that“[m]uch of plaintiffs’ evidence and analysis seems compellingand could easily support class certification.”
11. Please click here to read our discussion of the Second Circuit’s
decision in Waggoner.

the alleged fraud is revealed to the market,
only as backward-looking, indirect evidenceof the core question here [of] . . . whether[the] stock price is distorted at the time thatthe plaintiff trades.”12
The Seventh Circuit acknowledged that
“separating this argument from the kindof truth-on-the-market defense proscribedby Amgen’s holding on materiality cuts
extraordinarily fine.” The court explainedthat it “see[s] this case as a question of scopeand specificity[,]” given plaintiffs’ contention
that “the more general representations that[the company] made do not encompass themore specific representations it should havemade[.]” The Seventh Circuit instructed that“the question at class certification is . . . thelevel of specificity of the information themarket would have understood the price of[the company’s] common stock to transmit at
the time of the purchase transaction.”

Seventh Circuit: Where aStatement in a Tender Offer
Was “Subject to Change,”Updating That Statement
Cannot Give Rise to Securities
Fraud Liability
On June 22, 2020, the Seventh Circuit
affirmed the dismissal of a securities fraud
action alleging that a company violated
Sections 10(b) and 14(e) of the Securities
Exchange Act of 1934 in connection with atender offer by preliminarily announcing
the number of shares it would be purchasing
and the purchase price, and then correcting
those numbers in a press release after tradingclosed. Walleye Trading v. Abbvie, 962
F.3d 975 (7th Cir. 2020) (Easterbrook, J.).
Because the company expressly cautionedthat the preliminary numbers were “subject
to change,” the Seventh Circuit held that the
preliminary numbers could not be misleading
as a matter of law.
The Seventh Circuit found the plaintiff’s
Section 10(b) claims “perplexing.” The court
questioned, “How can an announcement,
explicitly subject to change, become false or
12. The Seventh Circuit noted that defendants’ expert opinion
that the alleged misrepresentations had no price impact
was “difficult . . . to square with the 10 percent price drop on
August 4, 2015.”
8

misleading when it is indeed changed?” Thecourt held that “[i]t does not: [the company]
did not make a false or misleading statement.
It accurately reported [the] preliminary
numbers” provided by the financial firm thecompany retained to receive all offers. The
court also rejected the plaintiff’s contention
that defendants’ failure to verify the accuracyof the financial firm’s preliminary numbers
supported an inference of scienter. The
court held that “neither the statute nor
any regulation requires an issuer to verify
someone else’s data before reporting them.”
As to the plaintiff’s Section 14(e) claim, theSeventh Circuit explained that only the SEC
and “private persons who can show thatthey relied on false or misleading statements

filed with the [SEC] can recover damages”
under Section 14(e). The court noted that theplaintiff did not even “try to show that [thecompany’s] statements were filed with the
SEC or that [the plaintiff] relied on them.”
Instead, the plaintiff simply “assume[d]that § 14(e) gives it a private right of action
to collect damages for press releases issued
after a tender offer closes.” The court foundthat “the end of the tender offer placed[the plaintiff] outside the zone of interests
protected by § 14” because “when [thecompany] announced the results of the Dutch
auction, there was no longer any way forshareholders to participate in it.” The court
concluded that “an investor cannot use §14(e)to challenge a statement made after a tender
offer has closed.”This edition of the
Securities Law Alert was edited by
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
Cheryl J. Scarboro
cscarboro@stblaw.com / +1-202-636-5529,
and George S. Wang
gwang@stblaw.com / +1-212-455-2228

9

New York

Los Angeles

Brooke E. Cucinella+1-212-455-3070
brooke.cucinella@stblaw.com

Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

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

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

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Palo Alto

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

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

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

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

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

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

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

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

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

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

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

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

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com
Linton Mann III+1-212-455-2654
lmann@stblaw.com

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

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

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com

Hong Kong
Adam Goldberg+852-2514-7552
adam.goldberg@stblaw.com

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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.
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11