Securities Law Alert
In This Edition:• Supreme Court: Constitutional Challenges to Agency Proceedings Can Be Brought Directlyin Federal District Court• Fourth Circuit: Affirms Dismissal of Securities Fraud Class Action Alleging
Misrepresentations or Omissions Regarding a Clinical Trial Drug
• Seventh Circuit: Specifies the Correct Pleading Standard for a Breach of the Duty ofPrudence Under ERISA in the Wake of Hughes• Eastern District of Virginia: Plaintiffs Failed to Allege That a Parent Company Was theMaker of Company Name-Change Statements But Given Leave to Amend
April 2023

Simpson Thacher’ssecurities litigation teamhas “a deep bench with top
talent, and their young lawyers
and associates provide a depthof experience.”– Chambers USA

Supreme Court:
Constitutional Challenges toAgency Proceedings Can Be
Brought Directly in Federal
District Court
On April 14, 2023, the Supreme Court issued
a unanimous opinion1 settling a circuit
split concerning whether a party to an
administrative enforcement action can sue
directly in federal district court to challenge
the agency’s constitutional authority toproceed, or whether the party must firstcomplete the administrative process before
seeking review in a federal court of appeals.
Axon Enter. v. FTC, 2023 U.S. LEXIS 1500
(2023) (Kagan, J.). Affirming Cochran v. SEC,
20 F.4th 194 (5th Cir. 2021) and reversing
Axon Enterprise v. FTC, 986 F.3d 1173
1. Chief Justice Roberts and Justices Alito, Barrett, Jackson,
Kavanaugh, Sotomayor and Thomas joined in the majority
opinion written by Justice Kagan. Justices Gorsuch andThomas each filed separate concurring opinions.

Simpson Thacher & Bartlett LLP(9th Cir. 2021), the Court held that federal
district courts have jurisdiction to hearlawsuits challenging the constitutionalityof agency proceedings and to resolve such
constitutional challenges.

The Thunder Basin Factors
Signal That District Courts
Have Jurisdiction
In Cochran, the SEC brought anadministrative enforcement action against
a CPA alleging that she failed to comply
with PCAOB auditing standards, while in
Axon, the FTC brought an action against
a manufacturer, alleging that its purchaseof its closest competitor violated the FTC
Act’s ban on unfair methods of competition.
Cochran and Axon both challenged theconstitutionality of agency proceedings
before administrative law judges (“ALJs”) on
the theory that the ALJs’ dual-layer tenure
protection unconstitutionally insulated themfrom presidential removal.

Justice Kagan, writing for the Court,
concluded that “each of the three Thunder
Basin factors signals that a district court has
jurisdiction to adjudicate [these] sweeping
constitutional claims.” In Thunder Basin
Coal v. Reich, 510 U.S. 200 (1994), theCourt set forth three factors designed todetermine whether a claim was “of the type”
Congress intended to be reviewed withina statutory review scheme. A court should
consider whether: (i) precluding district court
jurisdiction “could foreclose all meaningful
judicial review” of the claim; (ii) the claim
is “wholly collateral to the statute’s review
provisions”; and (iii) the claim is “outside theagency’s expertise.” If the answer to all threequestions is yes, it is presumed that Congress
did not intend to limit jurisdiction.
As to the first factor, Justice Kagan focused on
the interaction between the alleged injury andthe timing of review. Justice Kagan contrasted
situations where an appellate court could
undo an agency action (such as revoking
a fine) with situations where a party faces
allegedly unconstitutional agency authoritythat “is impossible to remedy once theproceeding is over, which is when appellate
review kicks in.” The Court concluded
that “[j]udicial review of [these] structural
constitutional claims would come too late tobe meaningful.”
As to the second factor, the Court concluded
that the claims “have nothing to do withthe enforcement-related matters theCommissions ‘regularly adjudicate’—andnothing to do with those they would
adjudicate in assessing the charges against[the CPA and the manufacturer].” Therefore,
the claims were “collateral” to any orders or
rules from which review might be sought.
Regarding the third factor, the Court
determined that the parties’ claims wereoutside the agencies’ expertise. The Court
noted that dual-layer tenure protection claims“raise standard questions of administrativeand constitutional law, detached fromconsiderations of agency policy.” The Court
stated that the manufacturer’s separate
constitutional challenge to the combinationof prosecutorial and adjudicative functions
was “distant from the FTC’s competence andexpertise” regarding competition policy. Thus,
the claims were not “of the type” that thestatutory review schemes reach and a district
court could review them.
The Court’s decision could open the district
courts to a wave of new constitutional
challenges to administrative adjudications
and stall government enforcement actions.

Fourth Circuit: Affirms
Dismissal of Securities
Fraud Class Action Alleging
Misrepresentations or
Omissions Regarding a
Clinical Trial DrugOn March 2, 2023, the Fourth Circuit
affirmed the dismissal of a putative
securities fraud class action alleging that adrug company, its president/CEO and its
CFO made material misrepresentations oromissions concerning a new drug, in violationof Section 10(b) of the Exchange Act and Rule10b-5. Emps. Ret. Sys. v. MacroGenics, 61
F.4th 369 (4th Cir. 2023) (Gregory, J.). The
court held that plaintiffs failed to sufficiently
allege any actionable misrepresentations oromissions that would give rise to a duty todisclose.

2

Background and Procedural History
Prior to this litigation, the company
developed a new drug and began a Phase 3
clinical trial. The trial required two primary“endpoints” (or pre-determined key measuresof the study’s success). The first endpoint
was prolongation of the progression freesurvival (“PFS”), which measures the lengthof time after a patient receives a particular
trial treatment where the disease does
not progress. The second endpoint was
prolongation of trial patients’ overall survival(“OS”), which measures how long a patient
survives regardless of whether their diseaseprogresses.
In February 2019, the company issued a press
release announcing that in October 2018
the clinical trial reached its first PFS-related
endpoint and included the CEO’s statementthat the new drug had “demonstrated asuperior outcome in a head-to-head study”
against the standard-of-care drug. In May
2019, the company issued a press release
disclosing a preliminary positive trend for
OS and that the company expected such
positive trend would continue, but alsothat subsequent results could fluctuate asadditional events accrue.

company eventually disclosed at the June2019 scientific conference. The Fourth
Circuit determined that, while a company
must disclose information when “necessary
to make statements made, in light of thecircumstances under which they were made,not misleading,” Matrixx Initiatives v.
Siracusano, 563 U.S. 27 (2011), defendants“did not have a duty to disclose the interim
OS results because their written and oral
statements prior to the May [2019] Press
Release, did not ‘speak’ about the OS data.”
Instead, the company’s statements had“primarily focused” on the clinical trial’s
success in reaching the PFS endpoint and“[a]ny language concerning the OS endpoint
was preliminary and focused on the ongoingnature of the OS data’s accumulation.”
The court further noted that the February
2019 press release “explicitly stated” that
follow-up to determine the impact of OS was“ongoing.” Reading this statement as a whole,“clearly indicated to all reasonable investors
that, although the PFS results experienced
success, one could not (and should not) draw
a conclusion on the OS data’s performanceas [the company] continued to track
OS performance.”

In June 2019, the company presented datafrom the October 2018 period at a scientificconference, including a graph that provided
a visual depiction of the interim OS data. The
company’s stock price fell nearly 22% after
the June 2019 conference and after an analyst
described the OS data as “underwhelming.”
Plaintiffs commenced a suit, asserting
violations of Section 10(b) and Rule 10b-5 andSections 11 and 12(a)(2) of the Securities Act.
Plaintiffs alleged that the graph presented
at the June 2019 conference was available
to, and should have been disclosed by, thecompany earlier and showed that the OS data
was not on track to generate a statisticallysignificant OS result when the data
fully matured.

Defendants Had No Duty toDisclose the Interim OS Results
Plaintiffs argued that defendants’ priorstatements concerning the PFS results put
the trial’s interim OS results “in play” andtriggered an ongoing duty of the company
to disclose at an earlier time the data the

The court also rejected plaintiffs’ contention
that defendants had a duty to disclose thegraph as a result of their oral communicationof the OS interim data earlier than theJune 2019 conference. The court explainedthat plaintiffs did not challenge the OS
interim data itself, but rather defendants’interpretation of it. While plaintiffs asserted
that the graph was inconsistent with
defendants’ positive statements, the court
found that defendants accurately interpreted
the OS interim data and that the graph was3not in fact contrary to defendants’ priorpositive statements. The court further
determined that “[b]ecause Defendants’positive OS-related statements were not false
or misleading, or an omission of the interim
OS data, we cannot conclude that they had
a duty to disclose the graph itself” prior toJune 2019.

Seventh Circuit: Specifies theCorrect Pleading Standard
for a Breach of the Duty ofPrudence Under ERISA in the
Wake of Hughes
On March 23, 2023, on remand from theSupreme Court’s decision last year in Hughes
v. Northwestern, 142 S.Ct. 737 (2022),2
the Seventh Circuit reexamined plaintiffs’
allegations that the defendant plan fiduciary
breached its duty of prudence under ERISA.
Hughes v. Northwestern, 63 F.4th 615 (7thCir. 2023) (Brennan, J.). Under the Supreme
Court’s decision in Hughes, to plead a breachof the duty of prudence under ERISA, aplaintiff must plausibly allege fiduciary
decisions outside a range of reasonableness.
The plan fiduciary argued that plaintiffs
must plead that a prudent alternative action
was “actually available.” Rejecting this, theSeventh Circuit held that “[a]t the pleadings
stage, a plaintiff must provide enoughfacts to show that a prudent alternative
action was plausibly available, rather thanactually available.”

The Seventh Circuit observed that Hughes“offers some guidance but stops short ofpronouncing a concrete standard” for abreach of the duty of prudence under ERISA.
The court noted that Hughes directed it “toreevaluate plaintiffs’ allegations based on
the duty of prudence articulated in Tibble v.
Edison International, 575 U.S. 523 (2015),
applying the pleading standard discussed in
Ashcroft v. Iqbal, 556 U.S. 662 (2009), andBell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007).” Iqbal and Twombly establishthat an obvious alternative explanation for a
defendant’s conduct that precludes liability
can undermine the claim’s plausibility. The
court stated that “[o]nly obvious alternative
explanations must be overcome at thepleadings stage, and only by a plausible
showing that such alternative explanations
may not account for the defendant’s conduct.”
The court then concluded that “whether
a claim survives dismissal necessarily
depends on the strength or obviousnessof the alternative explanation that thedefendant provides.”
Rejecting the plan fiduciary’s standard, thecourt found that it would go beyond theplausibility standard of Iqbal and Twombly.
The court explained that “[t]o the extent thatthe prudent course of action was unavailable,that will foreclose the claim. But if a courseof action was only possibly unavailable,
further factual development on the pleadings
will be necessary to resolve the claim onthat explanation.”
In applying this standard, the Seventh
Circuit concluded that plaintiffs plausibly
alleged that the plan fiduciary violated its
duty of prudence by incurring unreasonable
recordkeeping fees. The court noted thatplaintiffs alleged that recordkeeping services
are fungible, that the market for such services
is highly competitive and that the fees were
excessive relative to the recordkeeping
services rendered.
The Seventh Circuit also denied dismissal ofplaintiffs’ second claim that the plan fiduciary
failed to swap out retail shares for identical,
lower-cost institutional shares of the same
funds. The court noted plaintiffs’ allegations
that the plan fiduciary retained more
expensive retail-class shares of 129 mutual
funds, when less expensive but otherwise

2. Please click here to read our discussion of Hughes.
4identical institutional-class shares wereavailable to the plans.
In their third claim, plaintiffs alleged thatthe plan fiduciary’s retention of multiple
duplicative funds had led to investor
confusion. The court affirmed dismissal of this
aspect of the third claim because plaintiffs
failed to identify how plaintiffs were confused
and personally injured by the multiplicity
of funds. The court stated that “[u]nspecificallegations that a fiduciary provided too many
funds, without more, do not state a claim forbreach of the duty of prudence.” However,the court remanded this claim to the extent
that it concerned plaintiffs’ theory that if theplan fiduciary had consolidated the funds
into a single investment option, it would have
led to lower-cost investments, noting thatplaintiffs’ allegations suggested that a 2016
restructuring had accomplished that.

Eastern District of Virginia:
Plaintiffs Failed to Allege Thata Parent Company Was theMaker of Company NameChange Statements But Given
Leave to Amend
On March 14, 2023, the Eastern Districtof Virginia dismissed without prejudice asecurities fraud class action alleging:(i) that the U.S. subsidiary of a global
auto manufacturer, the subsidiary’s CEO/President, and its Head of Product andTechnology Communications violated Section
10(b) and Rule 10b-5 by making false andmisleading statements that it would bechanging its name; and (ii) control person
liability against the parent company. In re
Volkswagen AG Sec. Litig., 2023 U.S. Dist.
LEXIS 43031 (E.D. Va. 2023) (Alston, J.).

Background
The parent company is a global auto
manufacturer that sells gas-powered
vehicles in the U.S. through its wholly
owned subsidiary and has been expanding
into electric vehicles. On March 30, 2021,
the subsidiary published a press releaseannouncing that in May it would bechanging its name to emphasize its electricvehicle products.3 Reporters confirmed
the authenticity of the name change withthe parent company. The March 30 press
release remained on the subsidiary’s website
until after market close on March 30, 2021
and was then removed. Subsequently, theWall Street Journal reported that the parent
company intended the name change to be“an April Fools’ gag” and that it was intended“to get people talking.” Plaintiffs allege thatthe press releases led to an increase in theparent company’s American Depositary
Share price, which fell following the namechange retraction.

The Parent Company’s Liability
Was Not Established for Purposesof Rule 10b-5
Defendants argued that plaintiffs did
not allege any statement by the parent
company and that any subsidiary statement
was not legally attributable to the parent
company under Rule 10b-5. The Supreme
Court determined in Janus Capital v. First
Derivative Traders, 564 U.S. 135 (2011)that “for purposes of Rule 10b-5, the makerof a statement is the person or entity withultimate authority over the statement,
including its content and whether and how tocommunicate it.” The district court explainedthat the Supreme Court “held that a Janus
defense is available in a private plaintiff Rule10b-5 case even for the parent of a wholly
owned subsidiary insofar as the entities
retain independent boards and the parent is
3. The day before, on March 29, 2021, the subsidiary publishedon its website a draft press release dated April 29, 2021
announcing that it would be changing its name beginningin May. Various news outlets reported on the name changeeven though the draft only remained on the website forapproximately one hour.
5acting in a ‘speechwriter’ assisting capacity
rather than as a ‘speaker who takes credit—orblame—for what is ultimately said.’”
The court noted plaintiffs’ allegations that theparent company owns 100% of the subsidiary,
appoints all of the subsidiary’s directors
and executive officers, directly monitors its
day-to-day operations, financial reporting
and accounting, and participates in its publicstatement preparation and dissemination.
Plaintiffs alleged more specifically thata parent company official told the WallStreet Journal that, “There will be no namechange,” in response to an inquiry, which
the court stated “further suggest[ed theparent company’s] role as the chief speakerin these circumstances.” However, the court
determined that plaintiffs failed to allegewith particularity that the parent company“provided final approval over the press releaseand its details.” Citing Noto v. 22nd Century
Grp., 35 F.4th 95 (2d Cir. 2022), the court
concluded that “[m]erely alleging a daily
monitoring function and the participationin the preparation of public statements does

not allow this Court to infer that [the parent
company] ‘collaborated with the authors tosuch an extent that they controlled the press
release’s publication.’”4 The court held thatplaintiffs failed to allege that the subsidiary’s
executive defendants and the subsidiary“lacked final control over the press release’scontents or did not make the ultimate
decision as to what specific information to
include.” (quoting Noto, 35 F.4th at 104).
The court gave plaintiffs leave to amend their
allegations finding plaintiffs’ claim to not be
implausible as a matter of law. On March
28, 2023, plaintiffs filed a motion for leave
to amend and a proposed second amended
complaint, alleging that on March 29, 2021,
the parent company also published the draftpress release on its own global media website
and that this website explicitly attributed thestatements in this draft press release to theparent company. The court has yet to rule onplaintiffs’ motion.

4. Please click here to read our discussion of Noto.

This edition of the
Securities Law Alert was edited by
George S. Wang / +1-212-455-2228
gwang@stblaw.com
Alicia N. Washington / +1-212-455-6074
alicia.washington@stblaw.com andJonathan K. Youngwood / +1-212-455-3539
jyoungwood@stblaw.com

6New York

Los Angeles

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

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

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

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

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

Palo Alto

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

Rachel S. Sparks Bradley
Partner+1-212-455-2421

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

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

Meredith Karp
Partner+1-212-455-3074
meredith.karp@stblaw.com

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

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

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

Meaghan A. Kelly
Partner+1-202-636-5542
mkelly@stblaw.com

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

Alicia N. Washington
Partner+1-212-455-6074
alicia.washington@stblaw.com

Jeffrey H. Knox
Partner+1-202-636-5532
jeffrey.knox@stblaw.com

Linton Mann III
Partner+1-212-455-2654
lmann@stblaw.com

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

Karen Porter
Partner+1-202-636-5539
karen.porter@stblaw.com

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

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

Cheryl J. Scarboro
Partner+1-202-636-5529
cscarboro@stblaw.com

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

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

rachel.sparksbradley@stblaw.com

Stephen P. Blake
Partner+1-650-251-5153
sblake@stblaw.com
Bo Bryan Jin
Partner+1-650-251-5068
bryan.jin@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.

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 with the use of this publication.
Please contact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained from our
website, www.simpsonthacher.com.
7SimpsonThacherWorldwide

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

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

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

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

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

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

SOUTH AMERICA

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

8