Securities Law Alert
Year in Review:• Supreme Court Decisions and Developments• Circuit Court Decisions Addressing Section 10(b) Claims• Significant Delaware Supreme Court Decisions

2020

Supreme Court Decisions
and Developments
SEC May Seek Disgorgement in
Civil Enforcement Proceedings
Provided the Award Does Not
Exceed Net Profits

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On June 22, 2020, in Liu v. SEC, 140 S. Ct.
1936 (2020) (Sotomayor, J.), the Supreme
Court resolved the question it raised but
left open in Kokesh v. SEC, 137 S. Ct. 1635
(2017): whether the SEC is authorized to seek
disgorgement in federal court proceedings.
In an 8-1 decision, the Court upheld but
circumscribed the SEC’s ability to seek
disgorgement. Specifically, the Court heldthat disgorgement constitutes permissible“equitable relief” under 15 U.S.C. § 78u(d)(5),but only where disgorgement is based on net
profits and ordinarily where disgorged funds
are distributed to victims.
When the SEC brings enforcement actions
in federal court, it is authorized by statuteto seek a range of remedies, including “anyequitable relief that may be appropriate ornecessary for the benefit of investors.” In
Kokesh, the Court held that disgorgementof profits is a “penalty” for the purposes ofstatutes of limitations. However, the Kokesh
Court explained in a footnote that “[n]othing

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in this opinion should be interpreted as an
opinion on whether courts possess authority
to order disgorgement in SEC enforcement
proceedings or on whether courts haveproperly applied disgorgement principles inthis context.”1
In Liu, the petitioners argued thatdisgorgement was not an equitable remedy,
and therefore, not within the statutory
authorization. The Court held that adisgorgement award is proper so long as
it (1) does not exceed the wrongdoer’s net
profits, and (2) in the ordinary case, is given
to victims of the wrongdoing. The Court
observed that equity practice has historicallyallowed courts to deprive wrongdoers of
ill-gotten gains and that these remedies areequitable (instead of punitive) so long as they
are restricted to net profits and awarded to
victims. In light of this history, the Court held
the SEC is within its statutory authority toseek disgorgement in civil suits. The Court
declined to extend Kokesh’s conclusion thatdisgorgement is a penalty beyond the statuteof limitations context, noting that “thatdecision has no bearing on the SEC’s ability
to conform future requests for a defendant’s
profits to the limits outlined in common-law
cases awarding a wrongdoer’s net gains.”
1. Please click here to read our discussion of the Supreme Court’s
decision in Kokesh.

Justice Thomas dissented, writing that hewould hold that disgorgement is not an“equitable remedy” within the meaning of§ 78u(d)(5). In his view, “[d]isorgement is nota traditional equitable remedy” but is instead“a creation of the 20th century.”“Actual Knowledge” Requirement
for the Three-Year Statute ofLimitations for ERISA Breachof Fiduciary Duty Claims Is Not
Satisfied Merely by the Plaintiff’s
Receipt of the Relevant Disclosures
ERISA breach of fiduciary duty claims are
subject to a six-year statute of limitations
unless the plaintiff “had actual knowledgeof the breach or violation,” in which case athree-year statute of limitations applies. 29
U.S.C. § 1113(2). On February 26, 2020, theSupreme Court held that an ERISA plaintiff
does not necessarily have “actual knowledge”
of information contained in disclosures that
he received but did not read or recall reading.
Intel Corp. Inv. Pol’y Comm. v. Sulyma,
140 S. Ct. 768 (2020) (Alito, J.). The Court
found that in order to satisfy Section 1113(2)’s“actual knowledge” requirement, “theplaintiff must in fact have become aware ofthat information.”
In a unanimous decision authored by JusticeAlito, the Court held that Section 1113(2)’s“actual knowledge” requirement demands“more than evidence of disclosure alone.”
The Court determined that “[Section] 1113(2)begins only when a plaintiff actually is awareof the relevant facts, not when he shouldbe” based on the receipt of the relevant
disclosures. The Court explained that “a given
plaintiff will not necessarily be aware of all
facts disclosed to him; even a reasonably
diligent plaintiff would not know those facts
immediately upon receiving the disclosure.”
The Court rested its decision on the plain
meaning of the phrase “actual knowledge.”
The Court found that the phrase “actual
knowledge” refers to “[r]eal knowledge as
distinguished from presumed knowledge
or knowledge imputed to one.” The Court
explained that in order “to have ‘actual
knowledge’ of a piece of information, onemust in fact be aware of it.” The Court foundthat “if a plaintiff is not aware of a fact, hedoes not have ‘actual knowledge’ of that fact
however close at hand the fact might be.”Supreme Court Agrees to Hear
Class Action Certification Challenge
On December 11, 2020, the Court announced
that it would hear a bank’s challenge to thecertification of an investor class in a longrunning securities fraud case. Goldman Sachs
Grp. v. Ark. Teacher Ret. Sys., (No. 20-222).
The highly anticipated decision, expected
before the end of the Court’s current termin June, concerns the ability of defendants
to rebut the presumption of shareholder
reliance and the extent to which defendants
in opposing class certification can rely
on materiality.
On April 7, 2020, the Second Circuit affirmed
the district court’s certification of a class,which accused defendant of misrepresenting
its ability to identify and address conflicts ofinterest. Ark. Teacher Ret. Sys. v. Goldman
Sachs Grp., 955 F.3d 254 (2d Cir. 2020)(Wesley, J.).2 Plaintiffs alleged that certain“general statements” (for example, “[o]urclients’ interests always come first[]”) werefalse because defendant “made them whileknowing that it was riddled with undisclosed
conflicts of interest.” The Second Circuit heldthat the district court did not “abuse[] its
discretion by certifying the shareholder class,either on legal grounds or in its applicationof the Basic presumption.” This refers to thepresumption of classwide reliance on the
alleged misrepresentations that plaintiffs
must invoke for a private securities lawsuit
to proceed as a class action, which was firstrecognized in Basic v. Levinson, 485 U.S.
224 (1988). In their cert petition, defendants
asked the Court to address two questions.
First, whether a defendant may rebut the
Basic presumption by pointing to the generic
2. Simpson Thacher filed an amici curiae brief with the Second
Circuit on behalf of the Securities Industry and Financial
Markets Association and the Bank Policy Institute in supportof defendants-appellants.
2

nature of the alleged misrepresentations toshow that the statements had no impact on
the price of the security, even though that
evidence is also relevant to the substantive
element of materiality. Second, whether
a defendant seeking to rebut the Basicpresumption has only a burden of productionor also the ultimate burden of persuasion.
Commentators have noted that in practice the
Basic presumption is rarely rebutted and thatclass certification often causes defendants tosettle rather than risk further litigation.

Circuit Court Decisions
Addressing Section 10(b)ClaimsFirst Circuit: Disclosure of FDA
Concerns Undercuts Any Inferenceof Scienter
On April 9, 2020, the First Circuit affirmed
the dismissal of a securities fraud action
alleging that a biopharmaceutical company
failed to disclose “material facts about [thecompany’s] manufacturing problems and theimpact those problems were likely to have on
the FDA’s approval” of the company’s ocular
pain drug. Mehta v. Ocular Therapeutix, 955
F.3d 194 (1st Cir. 2020) (Stahl, J.). The First
Circuit found it significant that defendants
fully disclosed the FDA’s concerns regarding
certain manufacturing issues. The court heldthat these disclosures belied any inferenceof scienter.
The First Circuit held that plaintiffs’“allegations do not give rise to a strong
inference of scienter.” The court noted thatthe company’s 2016 and 2017 Forms 10-K

“disclosed receipt of the February 2016
Form 483, described its relevance to [thecompany’s] manufacturing capabilities, andwarned of its implications.” The 2016 and2017 Forms 10-K also specifically warned
investors that resolution of the issues
identified in the February 2016 Form 483 wasa prerequisite for FDA approval. The First
Circuit found “[t]hese informative disclosuresabout the nature and consequences of the
February 2016 Form 483 undercut any
inference that defendants intentionally or
recklessly misled investors” concerning thecompany’s compliance with “current Good
Manufacturing Practices” regulations.

Eighth Circuit: Affirms theDismissal of a Securities Fraud
Action Against a Major Retailer for
Failure to Allege Scienter
On April 10, 2020, the Eighth Circuit affirmed
the dismissal of a securities fraud action
alleging that a major retailer and several of its
executives made misstatements concerning
the company’s ultimately unsuccessful foray
into the Canadian market. In re Target Corp.
Sec. Litig., 955 F.3d 738 (8th Cir. 2020)(Kobes, J.). The Eighth Circuit determinedthat “[n]othing in the complaint makes a‘compelling’ case for fraud.” Rather, the court
found “the more compelling inference” is thatthe company’s executives “did not understandthe magnitude of the problems they faced”
with the Canadian stores.
The Eighth Circuit found that “none” ofplaintiffs’ allegations satisfied the scienter
requirement. The Eighth Circuit foundthat “[t]he strongest, but still insufficient,
allegation” concerned the company’s May
2014 representation that the longer the3Canadian stores had been open, the better
they were performing. Plaintiffs allegedthat defendants must have known that thisstatement was false because in August 2014,
the company “revealed that same-store sales
had fallen more than 11% in Canada over theprevious year.” The Eighth Circuit stated that“financial deterioration alone is not enoughto show fraud.” The court explained that “theapparent incongruity” between the May 2014
statement and the August 2014 financial
results was not sufficient to “show that the
May 2014 statement was necessarily false,
let alone that [company] executives knew it
was false.”

Ninth Circuit: Allegations That
Defendants Invested in and Touted
a Product Despite Knowing the FDA
Would Inevitably Deny Approval
Are “Implausible”
On June 10, 2020, the Ninth Circuit
affirmed the dismissal of a securities fraud
action alleging that a company mademisrepresentations concerning the likelihoodof FDA approval for one of its products.
Nguyen v. Endologix, 962 F.3d 405 (9th Cir.
2020) (Bress, J.). The court found “plaintiff’s
core theory—that the company invested
in a U.S. clinical trial and made promisingstatements about FDA approval, yet knew
from its experience in Europe that the FDA
would eventually reject the product—has
no basis in logic or common experience.”
The court determined that “the moreplausible inference is that the company madeoptimistic statements about its prospects
for FDA approval because its U.S. testing
looked promising, not because the company
was quixotically seeking FDA approval fora medical device application it knew wasdestined for defeat.”
The Ninth Circuit emphasized that“[a]llegations that are implausible do notcreate a strong inference of scienter.” Here,“[t]he central theory of the complaintis . . . that defendants knew the FDA would
not approve [the company’s product], or atleast that it would not do so on the timeline
defendants were telling the market” becauseof an “unsolvable” problem with the product.
The court found this “theory does not makea whole lot of sense” because it “depends
on the supposition that defendants would
rather keep the stock price high for a time
and then face the inevitable fallout once[the product’s] ‘unsolvable’ . . . problem wasrevealed.” The court observed that “the theory
might have more legs” if plaintiffs allegedthat “defendants had sought to profit fromthis scheme in the interim, such as by selling
off their stock or selling the company at apremium.” Because the complaint included
no such allegations, the court found plaintiffs’
theory of scienter “does not resonate incommon experience.” The court underscoredthat the Private Securities Litigation ReformAct “neither allows nor requires [courts] tocheck [their] disbelief at the door.”

Second Circuit: Reverses theDismissal of a Securities Fraud
Action Where the Allegations of aMaterial Omission Raised a Strong
Inference of Recklessness
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 Invs., 968 F.3d 204(2d Cir. 2020) (Wesley, J.). The Second
Circuit found plaintiffs adequately allegedthat the REIT’s “decision not to disclose the[l]oan . . . in the context of its disclosures
regarding [the tenant’s] financial health”
was “a sufficiently extreme departure fromthe standards of ordinary care to satisfy the[Private Securities Litigation Reform Act’s]
requirement for showing recklessness.”
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 “by 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.”
The court concluded that “[t]he facts asalleged create a compelling inference that[d]efendants made a conscious decision to notdisclose the [l]oan in order to understate theextent of [the tenant’s] financial difficulties,”
particularly because “multiple analysts
ho[n]ed in on [the tenant’s] rental payments
being key to [the REIT’s] prospects.”

4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.”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 “all the
major studies” show that “survival rates comebetween 15 to 19, 20 months. That’s it.” Thenin March 2014, an analyst asked how thecompany’s statistical assumptions would be
impacted if it assumed that the control group
lived for 24 or 25 months. The President &CMO responded that the company did nothave “any reason to believe that mediansurvival [rate] for these patients will be morethan [the] low 20s.” Plaintiffs alleged that the
September 2013 and March 2014 statements
were misleading because numerous
significant studies “showed survival rates
ranging from 25 months to 43 months.”
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 wasmade “at an important conference for biotech
investors.” Given the context, the court
determined that “[i]nvestors in attendance
reasonably would not have interpreted
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 professionalpresentation.” The Second Circuit heldthat the statement could lead “a reasonable
investor” to believe that “no credible studies

have shown resected pancreatic cancer
patients to have survival rates higher than 20
months.” The court found the March 2014
statement to be similarly misleading, “[b]othbecause of its posture as a response to a
specific question and its categorical nature.”

Ninth Circuit: Whistleblower
Complaint Filed by a Company
Insider May Constitute a
Corrective Disclosure
On October 8, 2020, the Ninth Circuit revived
a securities fraud action that the district court
had dismissed on loss causation grounds.
In re BofI Holding Sec. Litig., 977 F.3d 781(9th Cir. 2020) (Watford, J.). The Ninth
Circuit held plaintiffs adequately alleged thata whistleblower complaint filed by a former
employee constituted a corrective disclosurefor loss causation purposes.
The Ninth Circuit held that “the relevant
question for loss causation purposes iswhether the market reasonably perceived[the whistleblower’s] allegations as true
and acted upon them accordingly.” In thecase before it, the court noted that thewhistleblower’s “descriptions of wrongdoing[were] highly detailed and specific, and they
[were] based on firsthand knowledge that hecould reasonably be expected to possess by
virtue of his [former] position as a midlevelauditor” at the company. The court also foundit significant that the stock price dropped
more than 30% following the filing of thecomplaint. The court reasoned that “[a] pricedrop of that magnitude would not be expected
in response to whistleblower allegations
perceived as unworthy of belief.” The court
concluded that plaintiffs adequately allegedthat the whistleblower complaint was acorrective disclosure.

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Significant Delaware Supreme
Court Decisions
Federal Forum Selection Provisions
for Securities Act Claims Are
Facially ValidOn March 18, 2020, the Delaware Supreme
Court held that forum selection provisions incertificates of incorporation requiring actions
arising under the Securities Act of 1933 (the“Securities Act”) to be filed in federal court
are facially valid under Section 102(b)(1)3of the Delaware General Corporation Law.
Salzberg v. Sciabacucchi, 227 A.3d 102 (Del.
2020) (Valihura, J.). The Court recognizedthat federal forum provisions “can provide
a corporation with certain efficiencies inmanaging the procedural aspects of securities
litigation following the United States Supreme
Court’s decision in Cyan, Inc. v. Beaver
County Employees Retirement Fund,” 138 S.
Ct. 1061 (2018), which held that state courts
have concurrent jurisdiction over actions
asserting Securities Act claims.

The Chancery Court based its decision on
Boilermakers Local 154 Retirement Fund v.
Chevron Corp., 73 A.3d 934 (Del. Ch. 2013),
which held that companies may adopt forum
selection bylaws requiring “internal affairs”
litigation to be brought in Delaware Chancery
Court. The Delaware Supreme Court foundthat “Boilermakers did not establish the outer
limit of what is permissible under . . . Section
102(b)(1).” The Court explained that “[t]hereis a category of matters that is situated ona continuum between the Boilermakers
definition of ‘internal affairs’ and its
3. Section 102(b)(1) provides that a company’s certificate
of incorporation may include: “Any provision for the
management of the business and for the conduct of the affairsof the corporation, and any provision creating, defining,
limiting and regulating the powers of the corporation, thedirectors, and the stockholders . . . if such provisions are notcontrary to the laws of this State.” 8 Del. C. § 102(b)(1).

description of purely ‘external’ claims,” andheld that that the federal forum provision inthis case falls within “the universe of mattersencompassed by Section 102(b)(1).” The Court
found that claims under Section 11 of the
Securities Act “are ‘internal’ in the sense thatthey arise from internal corporate conduct
on the part of the Board and, therefore, fallwithin Section 102(b)(1).”Approval of a “Flawed Transaction”
After Consideration of Its Risks
Does Not Give Rise to an Inferenceof Bad Faith
On January 13, 2020, the Delaware
Supreme Court held that a board’s approvalof a “flawed transaction” that implicatedthe misappropriation of a competitor’s
confidential information did not give riseto an inference of bad faith, where “thedirectors considered the risks and nonethelessproceeded with the transaction.” McElrathv. Kalanick, 224 A.3d 982 (Del. 2020) (Seitz,
C.J.). The Court underscored that “there isa vast difference between an inadequate or
flawed effort to carry out fiduciary duties anda conscious disregard for those duties.”
In the case, plaintiff stockholder filed suitagainst the company’s directors claiming thatthey ignored an alleged theft of intellectual
property and failed to investigate pre-closing
diligence that would have revealed problems
with a 2016 transaction. Defendant directors
moved to dismiss under Court of Chancery
Rule 23.1, asserting that plaintiff failed tomake a demand on the board. The Court ofChancery dismissed the complaint, findingthat a majority of the board could havefairly considered the demand. The Delaware
Supreme Court affirmed, finding that amajority of the board was independent anddisinterested “because it had no real threatof personal liability due to [the company’s]
exculpatory charter provision.”
The Court explained that because of theexculpation clause in the company’s
Certificate of Incorporation, the directors
could face personal liability only if “theirconduct [was] motivated by an actual intent
to do harm,” or if there was “an intentionaldereliction of duty.” The Court emphasizedthat “[p]leading bad faith is a difficult
task and requires that a director acted
inconsistent[ly] with his fiduciary duties and,6

most importantly, that the director knew hewas so acting.”
The Court concluded that “[t]he complaint’s
allegations do not lead to a reasonable
inference that the board intentionally ignored
the risks of the transaction.” Here, the“board met to consider the [] acquisition,”
hired outside counsel and an investigative
firm to conduct due diligence, listened toa presentation from the company’s CEO,and “discussed the terms of the deal andits risks.” The Court determined that “theboard’s failure to investigate further cannot
be characterized fairly as an intentionaldereliction of its responsibilities.”

Chancery Court Did Not Err in
Finding the Deal Price Was theBest Evidence of Fair Value Despite
a Sales Process Described as“Not Perfect”
On October 12, 2020, the Delaware
Supreme Court affirmed a Chancery Court
decision holding that the deal price was themost reliable indicator of a metal mining
company’s fair value in an appraisal action,even though “[t]he sale process was not
perfect.” Brigade Leveraged Cap. Structures
Fund v. Stillwater Mining Co., 240 A.3d 3(Del. 2020) (Montgomery-Reeves, J.). The
Delaware Supreme Court further determinedthat the Chancery Court did not err in

declining to adjust the deal price to accountfor an increase in the commodity price of themetal mined by the mining company. The
Delaware Supreme Court explained that “fairvalue is just that, fair. It does not mean thehighest possible price that a company might
have sold for.”
The Delaware Supreme Court observed that
the Chancery Court “walked through eachstep of the sale process” and “found that there
were objective indicia of reliability.” While
the Delaware Supreme Court acknowledgedthat there were “fewer indicia of fairness
than [it] identified when reviewing thesales processes in DFC, Dell or Aruba, the[Chancery Court] did not abuse its discretionby determining that the objective indicia thatwere present provide a cogent foundation
for relying on the deal price as a persuasive
indicator of fair value.”4
Because the Chancery Court “thoroughly
analyzed the facts surrounding [thecompany’s] sale in accordance with [Delaware
Supreme Court] precedent,” the Delaware
Supreme Court declined to “second-guess”
the Chancery Court’s determination that “thedeal price was a reliable indicator of [thecompany’s] fair value.”
4. Please click here to read our discussion of the Delaware
Supreme Court’s discussion in Aruba. (This discussion also
addresses the Delaware Supreme Court’s decisions in DFC
and Dell.)This edition of the
Securities Law Alert was edited byPeter E. Kazanoffpkazanoff@stblaw.com / +1-212-455-3525,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539

7

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
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Susannah S. Geltman+1-212-455-2762
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Craig S. Waldman+1-212-455-2881
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Paul C. Gluckow+1-212-455-2653
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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
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jkreissman@stblaw.com
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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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