Securities Law Alert
In This Edition:• Supreme Court: The Court Hears Oral Argument on Whether Challenges to the Constitutionality of
In-House Agency Enforcement Proceedings Must Wait Until Agency’s Final Order Is Issued• Central District of California: Claim That an Electric Vehicle Company Made a Material
Misrepresentation About Customer Demand Survives Dismissal• Northern District of California: Plaintiff Sufficiently Alleged That an Online Broker’s “Significant”
Receipt of Certain Payments Was an Indirect Commission Fee• Southern District of New York: Class Action Dismissed Where Manufacturer Warned of Existing
Regulatory Strictures, the Prospect of Heightened Regulation and Attendant Investor Risks
November 2022

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Simpson Thacher & Bartlett LLPSupreme Court: The Court
Hears Oral Argument on
Whether Challenges to theConstitutionality of InHouse Agency Enforcement
Proceedings Must Wait Until
Agency’s Final Order Is Issued
On November 7, 2022, the Supreme Court
heard separate oral arguments in SEC v.
Cochran, No. 21-1239, and Axon Enterprisev. FTC, No. 21-86. At issue in both actions
is whether those facing agency action before
administrative law judges (ALJs) may
immediately challenge the constitutionalityof the in-house enforcement proceedings infederal district court—on the alleged basisthat ALJs have “a blatant constitutional
defect, dual-layered protection fromremoval”—or whether they must wait until

the agency issues a final order and thereafter
appeal that order to a circuit court.
In Axon Enterprise, the company was facing
an FTC antitrust investigation and suedin federal district court, claiming that the
FTC’s in-house administrative proceedings
violated its due process and equal protection
rights and that the agency’s ALJ was
unconstitutionally protected from removal.
Axon Enterprise alleged that the district court
had subject matter jurisdiction under 28
U.S.C. Section 1331 because its claims arose
under federal law. The Ninth Circuit upheld
the lower court’s dismissal of the case on the
grounds that the judicial review section of
the FTC Act “impliedly barred” district court
jurisdiction under the general grant to Section
1331. Axon Enter. v. FTC, 986 F.3d 1173 (9thCir. 2021). The Ninth Circuit explained that in
15 U.S.C. Section 45(c) the FTC Act provides“a detailed overview of how the FTC can issuecomplaints and carry out administrative

proceedings” and how respondents who aresubject to an FTC cease-and-desist order canobtain review in a circuit court of appeals.1
The Ninth Circuit noted that Section 45(c)“is almost identical to the statutory review
provision in the SEC Act, which other circuits
have held shows a fairly discernible intent tostrip district court jurisdiction.”
In Cochran, a CPA accused by the SEC of
failure to comply with auditing standards inviolation of the Exchange Act similarly filed
an action in the district court to challenge
the SEC’s use of ALJs in its administrative
proceedings. As had the district court in Axon
Enterprises, the district court dismissed
the case finding it lacked jurisdiction
under 28 U.S.C. Section 1331. On appeal,
however, the Fifth Circuit reversed, setting
up a circuit split. The Fifth Circuit heldthat the constitutionality of the ALJs could
be challenged in district court before an
administrative adjudication because the
Exchange Act’s statutory review provision 15
U.S.C. Section 78y(a)(1)2 did not “explicitly
or implicitly strip” the district court of federal
question jurisdiction to hear structural
constitutional claims challenging SEC
administrative proceedings. Cochran v. SEC,
20 F.4th 194 (5th Cir. 2021) (en banc).
1. “Any person, partnership, or corporation required by an orderof the Commission to cease and desist from using any methodof competition or act or practice may obtain a review of suchorder in the court of appeals of the United States, within any
circuit where the method of competition or the act or practicein question was used or where such person, partnership,or corporation resides or carries on business, by filing in
the court, within sixty days from the date of the service ofsuch order, a written petition praying that the order of theCommission be set aside.”
2. “A person aggrieved by a final order of the Commission
entered pursuant to this chapter may obtain review of theorder in the United States Court of Appeals for the circuit
in which he resides or has his principal place of business, orfor the District of Columbia Circuit, by filing in such court,
within sixty days after the entry of the order, a written petition
requesting that the order be modified or set aside in whole orin part.”Both Axon Enterprise and Cochran argued
that the text of the FTC Act’s and Exchange
Act’s statutory review provisions did not
expressly limit the district court’s jurisdiction.
They further argued that if those Acts wereread to implicitly strip the district courtsof federal question jurisdiction to hearconstitutional challenges, then they may facea years-long delay until the administrative
process concludes to raise their constitutional
challenges and would have no remedy forbeing forced to face allegedly unconstitutional
enforcement proceedings in the first place.
During the Axon Enterprise oral argument,
Justice Gorsuch emphasized the broad natureof the district courts’ jurisdiction under 28
U.S.C. Section 1331, stating that “1331 saysthat district courts have jurisdiction overthese claims absent any other consideration.
And, normally, we consider district courts
bound to exercise their jurisdiction when
they have a claim.” Justice Gorsuch thenstated that “the FTC Act that says cease-anddesist orders can be reviewed in the courtsof appeals rather than the district courts.”
Pointing out that there is no cease-and-desist
order here, Justice Gorsuch concluded, “I
would have thought that might have been
the end of the game . . . .” Similarly, in the
Cochran oral argument, Justice Alito focusedon the text of the Exchange and FTC Acts,
pointing out that “these two statutes don’teven say exclusive jurisdiction.” He appeared
to question whether it was appropriate to“infer it’s exclusive.” Justice Alito continued
to question whether the Court should further“infer that, except for some categories, somesubcategory of cases, this not only gives thecourts of appeals exclusive jurisdiction, but
it precludes jurisdiction that district courts
would have under 1331.”2

With respect to the Axon Enterprise’s
argument about a prejudicial delay, JusticeAlito inquired, “What sense does it makefor a claim that goes to the very structureof the agency having to go through theadministrative process?” The government’s
attorney responded that doing so avoids
piecemeal litigation and forces a party
to bring all of its challenges at the sametime. Weighing the practical consequencesof allowing challenges to proceed in
district court, Justice Kavanaugh similarlycommented in the Cochran oral argumentthat the “upside” of permitting such lawsuits
would be “more certainty, more clarity
quicker about a basic fundamental question
about the constitutionality of the agency itself
or the agency’s structure itself.”
Chief Justice Roberts also questioned why anagency would be better suited than a district
court to consider such structural claims. The
government’s attorney suggested that “theagency could explain, for instance, why fromits perspective it was either a good or a bad
characteristic to have ALJ’s with for-cause
removal protection.” Chief Justice Roberts
responded by stating, “It sounds to me likeyou’re just saying the agency might write abrief, presumably, defending the structureof the agency, which it can do when the casegoes before the district court.”

Central District of California:
Claim That an Electric Vehicle
Company Made a Material
Misrepresentation About
Customer Demand Survives
Dismissal
On October 20, 2022, the Central Districtof California granted in part and deniedin part dismissal of a putative securities
fraud class action against an electric vehicle
manufacturer, certain of its executives, andcertain executives of the SPAC with which
it merged, alleging that defendants madematerially false and misleading statements
regarding the number of vehicle reservations
the manufacturer received for one vehicle
model (the “FF 91”) and the FF 91’s expectedlaunch date. Zhou v. Faraday FutureIntelligent Electric, 2022 WL 13800633(C.D. Cal. 2022) (Snyder, J.). The court
held that plaintiffs adequately alleged thatthe reservation statement was a material
misrepresentation because it gave investors
a false impression that the company hadreceived significantly more paid reservations
than it had.

Background and Procedural History
The company and the defendant SPAC
announced their merger plans in a January
2021 press release stating that the company“had received over 14,000 reservations”
for the FF 91. Subsequently, a short seller
claimed in a report that the number ofreservations was “fabricated because 78%of the reservations were made by a single,
undisclosed affiliate” and that former
executives did not believe the model was
ready for production. In response, thecompany formed a special committee of
independent directors to investigate theshort seller’s claims. The special committee
subsequently publicly released its findingsthat the statements that the company hadreceived more than 14,000 FF 91 reservations
were “potentially misleading because only
several hundred of those reservations were
paid, while the others (totaling 14,000)
were unpaid indications of interest.” Thestock price subsequently dropped. Plaintiffs
principally claimed that the defendants’statements about the reservations violated
Section 10(b). Defendants moved to dismissfor failure to state a claim.

Plaintiffs Adequately Alleged That
the Reservations Statement Was aMaterial Misrepresentation
In considering whether the statement about
the number of reservations was a material
misrepresentation, the court explainedthat plaintiffs must show that defendants3

made a statement that was “misleading
as to a material fact” such that there is a“substantial likelihood that the disclosure of
the omitted fact would have been viewed by
the reasonable investor as having significantly
altered the total mix of information madeavailable.” Matrixx Initiatives v. Siracusano,
563 U.S. 27 (2011). While defendants
argued that plaintiffs failed to plead facts
controverting the literal veracity of thereservations statement, the court reasoned
that plaintiffs need only “demonstrate that a
particular statement, when taken in context,
conveyed a false or misleading impression.”
The court found that plaintiffs specified eachallegedly misleading statement and provided
the reasons each statement was misleadingwith particularity. Specifically, plaintiffs
alleged that: the reservations statement was
misleading because the level of consumer
interest and potential revenue from 14,000
paid reservations differed “dramatically”
from having only several hundred paid
reservations; the special committee
concluded that the reservations statement
was “potentially misleading” because only
a few hundred reservations were paid; theshort seller report claimed that 78% of thepaid reservations came from an undisclosed
affiliate; and the stock drop occurred afterinvestors learned that the company had
not received 14,000 paid reservations. The
court determined that these allegations
were “sufficient to demonstrate that thereservations statement was misleading
because it gave investors a false impressionthat [the company] had received significantly
more than several hundred paid reservations
from independent potential customers.”

Northern District of California:
Plaintiff Sufficiently Alleged
That an Online Broker’s“Significant” Receipt of Certain
Payments Was an Indirect
Commission Fee
On October 13, 2022, the Northern Districtof California granted in part and deniedin part dismissal of a putative securities
fraud class action alleging that an online
broker violated Section 10(b) by omitting
payment for order flow (“PFOF”)3 from its
FAQ webpage discussion of the company’s
revenue sources and made false andmisleading representations that its platform
was commission free, when it in fact was not.
In re Robinhood Order Flow Litig., 2022
WL 9765563 (N.D. Cal. 2022) (Rogers, J.).
The court held that plaintiff adequately
pleaded that the broker made fraudulently
misleading statements by omitting PFOF asa revenue source and by stating that it was acommission-free platform.

Plaintiff’s Allegations
The broker ran a mobile app and websitethat allowed users to engage in “self-directed
securities brokerage services.” Among otherthings, plaintiff challenged the broker’somission of PFOF from descriptions of its
revenue sources on its FAQ webpage. Plaintiff
claimed that this omission was misleading
because PFOF was a large revenue source
for the broker. Plaintiff also challenged thebroker’s representations that its platform
provided “commission free” trading. Plaintiff
alleged that the broker’s receipt of PFOF
served as an indirect commission fee that it
passed on to users.

Broker’s Failure to Disclose PFOF
in its FAQ Response on Revenue
Was Actionable
In challenging the broker’s omission of PFOF
from descriptions of its revenue sources on
its FAQ webpage, plaintiff alleged that theomission was misleading because PFOF wasa large source of revenue for the broker. The
broker argued that the omission was not
3. PFOF “is the payment or compensation that a brokerage orretail firm receives from principal trading firms directing
orders to different market makers.”
4

actionable because it had publicly disclosed
its receipt of PFOF through various means,including on other parts of its websites,in customer agreements and in tradeconfirmations, and because the information
was widely reported in the news. The court
rejected the broker’s argument, stating thatby suggesting that it was answering “How[our company] Makes Money” on its FAQ
webpage, it “was under a duty to ensure its
disclosures on that page were complete,accurate, and not misleading.” The court
determined that the omission was actionablebecause plaintiff sufficiently alleged thatthe omission caused its disclosures to be“incomplete, false and misleading.”

Plaintiff Sufficiently Alleged
That Broker’s CommissionFree Representation Was False
and Misleading
Plaintiff also alleged that the broker’s
description of its platform as “commissionfree” was false and misleading because its
customers received inferior execution prices
compared to its competitors’ customers.
Plaintiff alleged that the broker would agree
to an inferior execution price for its customers
than what principal trading firms were
offering in exchange for receiving a higher
PFOF rate, which increased the broker’s
profits. Plaintiff claimed that these inferior
execution prices amounted to an “indirect”
commission fee because the PFOF costs wereeffectively passed on to customers. Whilethe broker argued that its platform was infact commission free, the court determinedthat plaintiff sufficiently alleged that thebroker’s “significant receipt of PFOF acts as a
backdoor or indirect commission fee passed
to [its] users,” and the challenged statement
was therefore misleading.

Southern District of New York:Class Action Dismissed Where
Manufacturer Warned of
Existing Regulatory Strictures,
the Prospect of Heightened
Regulation and AttendantInvestor Risks
On September 30, 2022, the Southern
District of New York dismissed with prejudicea putative securities fraud class action
against a China-based manufacturer andmerchant of e-cigarettes, alleging that it mademisstatements and omissions in connection
with its U.S. IPO concerning the prospectof stricter e-cigarette regulation in China.
Garnett v. RLX Tech., 2022 WL 4632323(S.D.N.Y. 2022) (Engelmayer, J.). The court
held that plaintiffs failed to plausibly pleadthat the company made any misleadingstatement or omission because, on thewhole, the company’s IPO offering materials
fairly alerted investors to existing regulatory
strictures, the prospect of heightened
regulation, and the attendant risks toinvestors.

Background and Procedural History
Soon after the company’s IPO, Chinese
regulators posted draft regulations statingthat e-cigarettes would be subject to stricter
regulations, bringing them in line withtraditional tobacco products. Thereafter,
the company’s stock price dropped. Plaintiff
purchasers of the company’s securities
claimed violations of Sections 11 and 12(a)(2)of the Securities Act. Plaintiffs alleged that,among other things, the company’s offering
materials provided a false and misleading
narrative that the company was not facing
imminent regulatory changes, characterized“existing regulatory efforts as limitedin scope, rather than as harbingers of aforthcoming national standard,” misleadingly
claimed to be unaware of how government
authorities planned to regulate e-vapor
products, and inadequately disclosed thelikelihood of regulation by using the word“may” to describe the prospect of future
regulatory action rather than “will” or “shall.”Plaintiffs alleged that Chinese regulators
were preparing these stricter regulations
at the time of the company’s IPO and5publicly disclosed that the regulations werecertain to be enacted. Defendants moved
to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6).

Viewed Together and In
Context, the Offering Materials
Did Not Misrepresent or Omit
Material Facts
The court held that plaintiffs failed toplausibly allege a misstatement or omissionthat was actionable under Sections 11 or
12(a)(2). Citing In re Morgan Stanley Info.
Fund Securities Litigation, 592 F.3d 347 (2dCir. 2010), the court explained that “taken
together and in context” the offering materials“did not misleadingly state or omit facts
related to the prospect of more stringent
regulation of e-cigarettes in China.” Thecourt pointed out that the offering materials“explicitly noted, as a risk factor, that changes
in existing laws, regulations and policies andthe issuance of new laws, regulations andpolicies have materially and adversely affected
and may further materially and adversely
affect our business operations.” The court
explained that the offering materials statedthat Chinese government authorities “mayimpose more stringent laws, regulations andpolicies” on the e-vapor industry. The offering
materials also cited strict regulatory measurestaken by other countries, including taxes andoutright e-cigarette prohibition. The offering
materials additionally recited the various
regulatory measures that Chinese authorities

had already put in place as of the time of the
IPO. The court further found that the offering
materials alerted investors to the facts ofChina’s existing national regulations on
tobacco products while noting that they did
not currently apply to e-cigarettes. The court
found that the offering materials warned
that there could be “no assurance” that theregulatory regime would be favorable and thatthe regulatory landscape was uncertain.
As to plaintiffs’ argument that the offering
materials should have gone further bydisclosing that regulators would “inevitably”
bring e-cigarettes under the same regulatory
regime as tobacco, the court found thatplaintiffs did “not allege facts that made theadoption of such laws a foregone conclusion.”4
The court stated that the factual allegations“depict an environment in which regulationof e-cigarettes in China had graduallytightened and could well continue over time
to tighten.” However, the court determinedthat plaintiffs’ allegations did not plausibly
show that regulation of e-cigarettes as tobacco
products was inevitable. The court statedthat “[c]ompanies subject to government
regulation are not required to speculate orforesee coming regulation or its potential
effect on the company.”
4. Examining communications issued by Chinese regulators, thecourt characterized the approaches under consideration as“preliminary and precatory.” The court noted that even thelast regulator statement on the issue before the company’s
IPO did not announce that e-cigarettes would be regulated
as traditional tobacco products, instead declaring only thatthe regulator would “actively promote the introduction ofcontrol measures for new tobacco products such as Electronic
cigarettes.”

This edition of the
Securities Law Alert was edited by
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com
David Elbaum / +1-212-455-2861
david.elbaum@stblaw.com andSimona G. Strauss / +1-650-251-5203
sstrauss@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
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Marc P. Berger
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rachel.sparksbradley@stblaw.com

Stephen P. Blake
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Bo Bryan Jin
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Washington, D.C.
Meaghan A. Kelly
Partner+1-202-636-5542
mkelly@stblaw.com
Jeffrey H. Knox
Partner+1-202-636-5532
jeffrey.knox@stblaw.com
Karen Porter
Partner+1-202-636-5539
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Partner+1-202-636-5529
cscarboro@stblaw.com*Effective January 1, 2023

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