Securities Law Alert
In This Edition:• Second Circuit: Bank’s Failure to Disclose Money Laundering Suspicions Not Actionable As There Was
No Obligation to Self-Report• Third Circuit: FRCP 15(c) Applies to Statutes of Repose, Allowing Amendment of a Pleading After the
Expiration of a Repose Period• Northern District of California: Plaintiff’s Inability to Reconcile a Company’s Financial Reporting to Its
Market Interpretation, Without More, Does Not Plausibly Allege a Misstatement• Southern District of New York: Exchange Act Does Not Apply Because the OTCQX Is Not an Exchange
Under Morrison v. National Australia Bank
September 2021

Second Circuit: Bank’s Failure
to Disclose Money Laundering
Suspicions Not Actionable As
There Was No Obligation to
Self-Report“Recognized for its‘world class lawyering,’
Simpson Thacher &Bartlett LLP has a leading
litigation practice withwide-ranging capabilities.”– Legal 500

Simpson Thacher & Bartlett LLP

On August 25, 2021, the Second Circuit
affirmed the dismissal of a putative securities
fraud class action alleging that a bank’s
financial statements were misleading because
they incorporated revenue from money
laundering but failed to simultaneously
disclose what the bank knew about possible
money laundering at one branch. Plumber& Steamfitters Local 773 Pension Fund v.
Danske Bank, 2021 WL 3744894 (2d Cir.
2021) (Jacobs, J.). The court pointed outthat plaintiffs did not allege that the financial
numbers were manipulated in any way, onlythat defendants failed to simultaneously
disclose the anti-money laundering issues.
The court held that “because [the bank]
was under no obligation to self-report its
growing suspicions regarding those issues,

its disclosure of accurate historical data,
standing alone, is not actionable.”

Background andPlaintiffs’ Allegations
Between 2007 and 2015, the bank allegedly
failed to follow anti-money laundering (AML)
protocols at one of its European branches,
which allowed suspicious transactions ofapproximately $230 billion to flow throughthat branch. In 2018, after news of the bank’s
AML issues had become public but before thefull breadth was revealed, plaintiffs purchased
the bank’s American Depositary Receipts.
Plaintiffs alleged that the bank’s 2013-2015
financial statements included the allegedly
ill-gotten profits from the AML violations.
Plaintiffs claimed that it was misleading
under Section 10(b) of the Exchange Act
and Rule 10b-5(b) for the bank to release
these numbers without simultaneously
disclosing what it knew about possible money
laundering.

Accurate Financial Statements
Do Not Become Misleading Due
to Nondisclosure of Suspected
Misconduct That May HaveContributed to the Results
The court held that plaintiffs did not have an
actionable securities fraud claim for any of thebank’s alleged misstatements or omissions.
The court rejected plaintiffs’ theory that it was
misleading for the bank to release its financial
statements without also disclosing what
it knew about possible money laundering.
The court began its analysis by stating that“companies do not have a duty to disclose
uncharged, unadjudicated wrongdoing.”
The court further explained that “[a]s acorollary of that rule, accurately reported
financial statements do not automatically
become misleading by virtue of the company’s
nondisclosure of suspected misconduct that
may have contributed to the financial results.”
The court noted that in a related context, theSixth Circuit had concluded that a securities
law violation could not be premised on acompany’s disclosure of accurate historical
data. In re Sofamor Danek Grp., 123 F.3d 394(6th Cir. 1997).
The court stated that it was critical thatplaintiffs did not allege that the financial
numbers disclosed were manipulated
in any way, just that the bank failed tosimultaneously disclose the AML issues. The
court consequently determined that “because[the bank] was under no obligation to selfreport its growing suspicions regarding thoseissues, its disclosure of accurate historical
data, standing alone, is not actionable.” Thecourt reasoned that otherwise every company
whose quarterly financial reports include
revenue from transactions that violated AML
regulations could be sued for securities fraud.

The court thus affirmed the district court,
concluding that the plaintiffs’ “allegations
do not move the claims outside the realm ofcorporate mismanagement and into the realmof securities fraud.”

Third Circuit: FRCP 15(c)Applies to Statutes of Repose,
Allowing Amendment of a
Pleading After the Expirationof a Repose Period
On September 2, 2021, the Third Circuit
affirmed the Middle District of Pennsylvania’s
decision to allow amendment of a pleading
after the expiration of a repose period in asecurities fraud class action alleging claims
under the Securities Act and the ExchangeAct. Se. Pa. Transp. Auth. v. Orrstown Fin.
Servs., 2021 WL 3923389 (3d Cir. 2021)(Ambro, J.). The court held that Federal Ruleof Civil Procedure 15(c) allows amendmentof a pleading after the expiration of a repose
period because Rule 15(c)’s “relation-back”
doctrine leaves the legislatively mandated
deadline intact and does not disturb any ofdefendants’ vested rights to repose.

Background and Procedural History
In 2012, plaintiff filed suit in federal court
bringing claims under the Securities Act
and the Exchange Act alleging that a bank,its officers, and its parent company (the“Bank Defendants”) had made material
misrepresentations in the bank’s financial
disclosures. Subsequently, plaintiff moved forleave to file a Third Amended Complaint in
2019, which reasserted previously dismissed2

claims from the Second Amended Complaint,
including claims against some parties1 who
had previously received a dismissal of all
claims against them.
Plaintiff argued that it should be permitted
to reinstitute the claims “because it foundfurther evidence to support them throughdiscovery after the partial dismissal of theSecond Amended Complaint.” Defendants
argued that the reasserted claims were timebarred because plaintiff sought to file theThird Amended Complaint outside the repose
periods for Securities Act and Exchange Act
claims. The district court granted plaintiff’s
motion and then granted defendants’ motion
to file an interlocutory appeal. Subsequently,
the Third Circuit granted defendants’ request
to appeal.

The Relation-Back Doctrine Applies
Because the Amended Complaint
Restates the Original Claim with
Greater Particularity and Amplifies
the Factual Circumstances
The court began its analysis by explaining
that, consistent with Rule 15’s liberalapproach to pleading, “the relation-back
doctrine under Rule 15(c) allows a court
to treat a later-filed amended pleading as
if it had been filed at the time of the initial
pleading.” The court stated that Rule 15(c)“applies here as long as the Third Amended
Complaint restates the original claim withgreater particularity or amplifies the factual
circumstances surrounding the pertinent
conduct.” The Third Circuit determined that
the Third Amended Complaint “both restates
claims with greater particularity and amplifies
the factual circumstances surrounding therelevant conduct by adding significantly morefactual detail to [plaintiff’s] existing claims.”

the rights and liabilities of fewer than all theparties does not end the action as to any of theclaims or parties.” The Third Circuit statedthat because the district court had not decided
all claims as to all parties at the time of therepose period’s expiration, none of plaintiff’s
claims in the action ended (except, as thecourt noted, for the dismissal of all claims
against certain individual bank officers).

Relation Back Is Consistent with the
Purpose of Statutes of Repose
As to whether the relation-back doctrine isconsistent with the purpose of statutes ofrepose, the court explained that even if “arepose statute’s purpose is to give defendants
protection after a certain amount of time, itdoes not defeat that purpose for a plaintiff
to bring an action within the time allotted—
even if the plaintiff later amends the precise
form of its pleadings.” The court found thatplaintiff brought its action initially within theapplicable repose periods, and reiterated that
“under Rule 54(b), reinstatement of dismissed
claims cannot constitute the filing of a new
action until a court has decided all claims
against all parties to the initial action.” Thecourt also pointed out that while plaintiff did
wish to expand its complaint with additional
facts, it was “not bringing any new legal
claims or adding new parties that were notincluded in the First Amended Complaint.”

In response to defendants’ argument thatplaintiff’s previously dismissed claims wereextinguished by the expiration of the repose
period even though the action continued,
the Third Circuit pointed out that plaintiff
brought both Securities Act and Exchange
Act claims against all defendants before theapplicable repose periods expired. The court
then explained that “under Rule 54(b), any
order that decides fewer than all the claims or
1. These parties were the underwriters of the bank’s 2010
offering, the bank’s independent auditor, and certain
individual bank officers.
3Northern District ofCalifornia: Plaintiff’s Inability
to Reconcile a Company’s
Financial Reporting to Its
Market Interpretation,
Without More, Does
Not Plausibly Allege a
Misstatement
On August 17, 2021, the Northern District ofCalifornia dismissed with leave to amend aputative securities fraud class action alleging
that a solar energy company and certain
executives misrepresented and/or failed todisclose that the company’s revenues wereartificially inflated. Hurst v. Enphase Energy,
2021 WL 3633837 (N.D. Cal. 2021) (Freeman,J.). The court held that the complaint failed
to plead a material misrepresentation oromission under the heightened pleading
standards of the Private Securities Litigation
Reform Act (PSLRA). The court noted thatthe complaint was “entirely predicated on[a short seller’s] Report’s insistence that [thecompany’s] financial reporting does not add
up.” However, the court determined the factthat plaintiff and the short seller could not“reconcile the financials reported by [thecompany] to their interpretation of the solar
market, without more, does not plausibly
allege a misstatement.”

Background
Plaintiff claimed that defendants
misrepresented and/or failed to disclose
to investors that its revenues were inflated
and that the company engaged in improper
deferred revenue accounting practices.
Plaintiff’s allegations were largely derived
from a 2020 short seller report. The reportstated, among other things, that financial
statements filed with the SEC by the company
were “fiction” and that, based on theirresearch, the short seller estimated that atleast $205.3 million of reported US revenue
in FY 2019 was fabricated. Plaintiff allegedthat the company’s FY 2019 revenue wasartificially inflated “by a whopping 47.7%.”
The court stated that the report purported
to be based on an analysis of the company’s
reported financials along with a private
investigation based on interviews withformer employees.

The PSLRA Demands More Than
Allegations That “Cherry Pick”
Financial Data from a Short
Seller Report
The court granted defendants’ dismissal
motion on the basis that plaintiff failed
to plead a material misrepresentation oromission. The court found that plaintiff failed
to plausibly allege a misstatement by merely
alleging that plaintiff and the short seller
could not reconcile the company’s financials
to their interpretation of the solar market.
The court also noted that plaintiff did not
identify any restatement of the company’s
accounting or any missed earnings revealing
the impact of alleged accounting fraud.
Considering the severity of the revenue
inflation alleged—47.7% in FY 2019—thecourt found “it wildly implausible thatneither such event would have occurred in
the aftermath of the publication of the [shortseller] Report.” Again reiterating that theallegations were directly derived from a shortseller report, the court concluded that the
PSLRA demands more than allegations that
“do little more than cherry pick financial dataand present such data in a manner favorable
to Plaintiff’s theory.”

Plaintiff Failed to Allege How
the Company Violated Its
Accounting Standard
Separately, the court found that plaintiff
failed to point to any accounting standard
that the company misapplied. Specifically,
plaintiff alleged that the company adopted
the ASC 606 accounting standard in January
2018, but the court found that plaintiff failed
to allege how the company ran afoul of thisstandard. The court stated that the complaint4

alleged in a “conclusory” fashion that thecompany began deferring both portions of
its revenue after adopting the standard, but
did not plead “facts that set out the why thisdeference was improper under GAAP.” Thecourt concluded that while it is indisputablethat “premature revenue recognition is a
GAAP violation,” plaintiff must still plead
facts supporting the existence of a GAAP
violation. Explaining that GAAP provisions
are subject to interpretation and “tolerate a
range of reasonable treatments, leaving the
choice among alternatives to management[,]”the court stated that plaintiff failed to plead
any facts showing that the company exercised
its judgment in a way that violated GAAP.

over-the-counter market, is not an “exchange”
as is required under the first prong of
Morrison v. Nat’l Australia Bank, 561 U.S.
247 (2010).

Section 10(b) Does Not Apply
Beyond U.S. Borders
The court began its discussion by quoting a
recent Second Circuit decision stating that
“Section 10(b) of the Securities Exchange
Act does not apply beyond U.S. borders.”
Quoting Cavello Bay Reinsurance v. Shubin
Stein, 986 F.3d 161 (2d Cir. 2021).2 The court
then explained that under Morrison courts
must limit the application of Section 10(b) to“transactions in securities listed on domestic
exchanges, and domestic transactions in othersecurities.”

First Prong of Morrison Applies
Section 10(b) to Transactionsin Securities Listed on a
Domestic ExchangeSouthern District of New York:
Exchange Act Does Not Apply
Because the OTCQX Is Not an
Exchange Under Morrison v.
National Australia Bank
On August 30, 2021, the Southern District of
New York dismissed with leave to amend an
individual action and consolidated purported
securities fraud class actions alleging thata Canadian company doing business in the
U.S., its senior secured lender, and certain
executives at both companies violated Section
10(b) of the Exchange Act and Rule 10b-5
thereunder by failing to disclose information
regarding the company’s relationship with its
senior secured lender/largest financer andcertain terms of the two entities’ financing.
In re iAnthus Cap. Holdings Sec. Litig.,
2021 WL 3863372 (S.D.N.Y. 2021) (Kaplan,J.). The court held that the Exchange Act
does not apply because its use would be
extraterritorial and therefore improper. The
court determined that the OTCQX, where thecompany’s common shares trade in the U.S.

The court stated that “[u]nder the firstprong of Morrison, Section 10(b) is properly
applied to transactions in securities listed on
domestic exchanges.” Plaintiffs alleged thatthe company’s common shares trade in the
U.S. over-the-counter market on the OTCQX.
Therefore, the court framed the issue as
whether the OTCQX qualifies as a domestic
exchange. The court explained that, according
to the SEC’s implementing regulations under
the Exchange Act, an exchange “is limited
to an organization, association, or group of
persons who (1) bring together the orders
for securities of multiple buyers and sellersand (2) use established, non-discretionary
methods under which such orders interact
with each other, and the buyers and sellers
entering such orders agree to the termsof a trade.” The court, citing Black’s Law
Dictionary, then explained that by contrast“securities traded over-the-counter trade
between brokers and dealers who negotiate
directly and not on an organized securities
exchange or other order-matchmaking
service.”
Citing the Third Circuit, the court also statedthat “[o]ver-the-counter markets are notnational securities exchanges within the scope
2. Please click here to read our discussion of the Second Circuit’s
decision in Cavello Bay.
5

of Morrison because the stated purpose of the
Exchange Act refers to securities exchanges
and over-the-counter markets separately,
which suggests that one is not inclusive of
the other and a national securities exchange
is explicitly listed in Section 10(b)—to the
exclusion of the OTC markets.” United States
v. Georgiou, 777 F.3d 125 (3d Cir. 2015).
The court concluded that “over-the-countertransactions in [the company’s] common
stock are, by definition, those that do notoccur on an exchange within the meaningof Morrison.”

Plaintiffs Failed to Allege Facts
Showing the Transactions Qualified
as Domestic Transactions Under
Morrison’s Second Prong
Separately, the court determined thatplaintiffs also failed to allege specific facts
showing that any of the three transactions at

issue qualified as a “domestic transaction[ ]in other securities” under Morrison’s second
prong. Transactions are considered domestic
under Morrison only “when the parties
incur irrevocable liability to carry out thetransaction within the United States orwhen title is passed within the UnitedStates.” The court explained that “plaintiffs
must allege specific facts including, but notlimited to, facts concerning the formationof the contracts, the placement of purchaseorder, the passing of title, or the exchangeof money.” With respect to the transactions
at issue, plaintiffs failed to include specificallegations concerning their location andstructure. The court noted that “the mere factthat a trade was made through the UnitedStates over-the-counter market does notindicate where the parties to that transaction
incurred irrevocable liability or where title
passed.”This edition of the
Securities Law Alert was edited by
Lynn K. Neuner / +1-212-455-2696
lneuner@stblaw.com and
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com

6New York

Los Angeles

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

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

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

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

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

Palo Alto

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

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

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

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

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

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

Sarah L. Eichenberger+1-212-455-3712
sarah.eichenberger@stblaw.com

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

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

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

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

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

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

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

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

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

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com
Joshua A. Levine+1-212-455-7694
jlevine@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.
Meaghan A. Kelly+1-202-636-5542
mkelly@stblaw.com
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

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

The contents of this publication are for informational purposes only. Neither this publication nor the
lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
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