Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Consider Whether Section 14(e) Claims for Misrepresentations or
Omissions in Connection With a Tender Offer Require a Showing of Scienter• Second Circuit: Reverses Dismissal of an ERISA Action Alleging Breach of the Duty of Prudence Based on
the Plan Defendants’ Failure to Issue an Early Corrective Disclosure in the Company’s SEC Filings• Seventh Circuit: SLUSA Precludes State-Law-Based Securities Class Actions Even If the Proposed Class
Consists of Fifty or Fewer Members• Tenth Circuit: Pursuant to Section 929P(b) of the Dodd-Frank Act, the Conduct and Effects Tests Govern the
Extraterritorial Reach of SEC Enforcement Actions• Middle District of Tennessee: Denies Class Certification Where Defendants Rebutted the Basic Presumptionof Reliance With Evidence of Lack of Price Impact

January 2019

Supreme Court: Grants
Certiorari to Consider
Whether Section 14(e) Claims
for Misrepresentations or
Omissions in Connection
With a Tender Offer Require a
Showing of Scienter
Simpson Thacher“provides ‘hard-nosed,
smart and efficient’
representation to majorbanks . . . across many of thehighest-profile pieces of litigation
and regulatory actions affecting
the industry.”–The Legal 500 2018

On January 4, 2019, the Supreme Court
granted certiorari to consider whether
scienter is a requirement for a claim of a
misstatement or omission in connection
with a tender offer under Section 14(e) of the
Securities Exchange Act of 1934 (“ExchangeAct”).1 Emulex Corp. v. Varjabedian, No.
18-459. The Second, Third, Fifth, Sixth and1. Section 14(e), titled Untrue statement of material fact oromission of fact with respect to tender offer, provides:
It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state a material
fact necessary in order to make the statements made, inthe light of the circumstances under which they are made,not misleading, or to engage in any fraudulent, deceptive,
or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any
solicitation of security holders in opposition to or in favor ofany such offer, request, or invitation.
15 U.S.C. § 78n(e). Section 14(e) was added as an amendment
to the Exchange Act pursuant to the Williams Act, which wasenacted in 1968.

Simpson Thacher & Bartlett LLP

Eleventh Circuits have held that plaintiffs
must plead and prove scienter in order toprevail on a claim alleging a misstatement
or omission under Section 14(e).2 But inVarjabedian v. Emulex Corp., 888 F.3d
399 (9th Cir. 2018) (Murguia, J.), the Ninth
Circuit found that “the first clause of Section
14(e) [which addresses misstatements
and omissions] requires a showing of only
negligence, not scienter.” The court reasoned
that “the text of the first clause of Section
14(e) is devoid of any suggestion that scienteris required.”
The Ninth Circuit observed that the five othercircuits to address this question based theirdecisions “on the shared text found in both
Rule 10b-5 and Section 14(e).”3 However,
2. See SEC v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004); Adams
v. Standard Knitting Mills, 623 F.2d 422 (6th Cir. 1980); In
re Digital Island Secs. Litig., 357 F.3d 322 (3d Cir. 2004);
Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir.
1974); Chris-Craft Indus. v. Piper Aircraft Corp., 480 F.2d
341 (2d Cir. 1973).
3. Rule 10b-5(b), titled Employment of manipulative anddeceptive devices, provides in relevant part:
It shall be unlawful for any person, directly or indirectly. . . [t]o make any untrue statement of a material fact or toomit to state a material fact necessary in order to make thestatements made, in the light of the circumstances underwhich they were made, not misleading . . . in connection
with the purchase or sale of any security.

the Ninth Circuit found that “importantdistinctions exist between Rule 10b-5 andSection 14(e) . . . that strongly militate against
importing the scienter requirement from thecontext of Rule 10b-5 to Section 14(e).” Thecourt explained that Rule 10b-5(b)’s scienter
requirement is based not on the text of thatrule but rather on the language of Section
10(b), pursuant to which Rule 10b-5 waspromulgated. The court noted that in Ernst &Ernst v. Hochfelder, 425 U.S. 185 (1976), theSupreme Court recognized that Rule 10b-5
could be read as imposing only a negligencestandard, but held that the rule requires
scienter because it was promulgated pursuant
to Section 10(b), which permits regulation of
only “manipulative or deceptive devices.” The
Ninth Circuit reasoned that “Section 14(e)differs fundamentally from Section 10(b)” inthat the SEC may regulate non-fraudulent
conduct under Section 14(e). The court
further found that the legislative history of
the Williams Act, pursuant to which Section
14(e) was enacted, also “supports a negligencestandard.”
Rather than reading the first clause of
Section 14(e) consistently with Rule 10b-5,
the Ninth Circuit found that Section 14(e)should instead be “interpreted harmoniously”
with Section 17(a)(2) of the Securities Act
of 1933 (“Securities Act”), which contains“nearly identical text” and “serve[s] similar
purposes.”4 The Ninth Circuit explainedthat in Aaron v. SEC, 446 U.S. 680 (1980),
the Supreme Court held that scienter is nota requirement for a Section 17(a)(2) claim,
and that the same standard should apply to
Section 14(e).
The Supreme Court is expected to resolve thecircuit split on whether scienter is required
for misstatement or omission claims brought
under Section 14(e). Petitioners, as well as the
Chamber of Commerce as amicus curiae, haveraised the larger question of whether there isany basis for inferring a private right of action
under Section 14(e). This issue was not raised
before or addressed by the Ninth Circuit, andthus the Supreme Court may decline to reachit. The Court will hear the case later this term.
A date for oral argument has not yet been set.
4. Section 17(a)(2) provides in relevant part:
It shall be unlawful for any person in the offer or sale of any
securities . . . to obtain money or property by means of any
untrue statement of a material fact or any omission to statea material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading.

Second Circuit: Reverses
Dismissal of an ERISA Action
Alleging Breach of the Duty ofPrudence Based on the Plan
Defendants’ Failure to Issue
an Early Corrective Disclosurein the Company’s SEC Filings
On December 10, 2018, the Second Circuit
reversed dismissal of an ERISA action against
the fiduciaries of a technology company’s
employee stock ownership plan (“ESOP”).
Jander v. Ret. Plans Comm. of IBM, 910
F.3d 620 (2d Cir. 2018) (Katzmann, C.J.).
Plaintiffs claimed that the Plan defendants
breached their duty of prudence by failingto disclose inside information concerning
the overvaluation of one of the company’sbusiness divisions. The Second Circuit
found plaintiffs adequately alleged “that a
prudent fiduciary in the Plan defendants’position could not have concluded” that “earlycorrective disclosure” of the impairmentof the overvalued business, “conductedalongside the regular SEC reporting process,”would have done more harm than good to thefund. The Second Circuit further held that thedismissal of plaintiffs’ parallel securities fraud
action for failure to adequately allege scienterdid not preclude plaintiffs’ ERISA action,
because no heightened pleading standard
analogous to the Private Securities Litigation
Reform Act (“PSLRA”) applies to ERISA
claims.5

Plaintiffs Adequately Alleged thata Prudent Fiduciary Could Not
Have Concluded that Disclosing theOvervaluation Would Have Done
More Harm Than GoodIn Fifth Third Bancorp v. Dudenhoeffer, 134
S.Ct. 2459 (2014), the Supreme Court heldthat in order “[t]o state a claim for breach of
the duty of prudence on the basis of inside
information, a plaintiff must plausibly allege
an alternative action that the defendant
could have taken that would have been
consistent with the securities laws and that a
prudent fiduciary in the same circumstances
would not have viewed as more likely to
5. On January 18, 2019, the Second Circuit denied defendants’petition for a rehearing. Defendants have indicated that they
intend to file a petition for certiorari.

15 U.S.C. § 77q(a)(2).
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harm the fund than to help it.”6 Later in its
decision, the Fifth Third Court instructedthat “lower courts faced with such claims
should also consider whether the complaint
has plausibly alleged that a prudent fiduciaryin the defendant’s position could not haveconcluded that stopping purchases . . . or
publicly disclosing negative information
would do more harm than good to the fund.”
The Second Circuit in Jander observed that
the Fifth Third Court’s first articulation of the“more harm than good” test “suggests thatcourts ask what an average prudent fiduciarymight have thought,” while the Court’s “latter
formulation appears to ask . . . whether any
prudent fiduciary could have considered theaction to be more harmful than helpful.” The
Second Circuit stated that it was “not clear
which of these tests determine whether aplaintiff has plausibly alleged that the actions
a defendant took were imprudent in light ofavailable alternatives.”7
The Second Circuit found it unnecessary toresolve this question because the court foundplaintiffs “plausibly [pled] a duty-of-prudence
claim even under the more restrictive‘could not have concluded’ test.” First,
the court found that “the Plan defendants
allegedly knew that [the company’s] stock
was artificially inflated through accounting
violations.” Second, the court deemed it
significant that two of the Plan defendants“had primary responsibility for the public
disclosures that had artificially inflated
the stock price.” The court found plaintiffs
plausibly alleged that “disclosures could
have been included within [the company’s]quarterly SEC filings and disclosed to the
ESOP’s beneficiaries at the same time in
the Plan defendants’ fiduciary capacity.”
Third, plaintiffs cited economic analyses
demonstrating that the longer a fraud is
6. Please click here to read our discussion of the Supreme Court’s
decision in Fifth Third.
7. In Amgen v. Harris, 136 S.Ct. 758 (2016), the Supreme Court
found that the Ninth Circuit incorrectly held that plaintiffs
adequately alleged a duty of prudence claim based on inside
information. The Amgen Court stated that the Ninth Circuit“failed to assess whether” plaintiffs “‘plausibly alleged’ thata prudent fiduciary in the same position ‘could not haveconcluded’ that the alternative action would do more harmthan good.” The Second Circuit in Jander observed thatAmgen could be read as an endorsement of the Fifth Third
Court’s “could not have concluded” formulation of the“more harm than good” test. Alternatively, the court notedthat Amgen could also be viewed as holding simply that“allegations about why an alternative action would do moregood than harm must appear in the complaint itself.” Pleaseclick here to read our discussion of the Supreme Court’s
decision in Amgen.

concealed, the greater the reputationalharm the company suffers and the larger theultimate stock drop. The court found that“[w]hile these economic analyses will usually
not be enough on their own to plead a dutyof-prudence violation, they may be consideredas part of the overall picture.” Fourth, because
plaintiffs alleged that the market for thecompany’s stock was efficient, the court foundno basis for a prudent fiduciary to “fear an
irrational overreaction to the disclosure offraud.”
Finally, the Second Circuit found it“particularly important” that the company
was “likely to sell the business and would
be unable to hide its overvaluation from thepublic at that point.” The court noted that“[i]n the normal case, when the prudent
fiduciary asks whether disclosure would
do more harm than good, the fiduciary ismaking a comparison only to the statusquo of non-disclosure.” Here, “however,the prudent fiduciary would have [had] tocompare the benefits and costs of earlier
disclosure to those of later disclosure—nondisclosure [was] no longer a realistic pointof comparison.” The court explained thatthe company ended up making a $1.5 billion
payment to the buyer of the business at issue,“the announcement of which constituted
a corrective disclosure to the publicmarkets in this action.” The Second Circuit
determined that the allegations concerning
the sale of the business “tip[ped] the scales
toward plausibility.”

The Dismissal of Plaintiffs’ Parallel
Securities Fraud Action Did Not
Preclude Plaintiffs’ ERISA Suit
The Second Circuit also considered “therelevance, if any, of the parallel securities
fraud suit” which the district court had
dismissed for failure to adequately allege
scienter. Defendants contended that “allowing[plaintiffs’] ERISA claim to go forward on
essentially the same facts would lead to an
end run around the heightened pleading
standards set out in the [PSLRA].” The
Second Circuit held that the dismissal of the
securities fraud action was “not preclusive”
as to the ERISA action “because the PSLRA
does not apply to ERISA actions.” The court
explained that plaintiffs in ERISA actions“are accusing defendants only of violating afiduciary duty of prudence, which does notcarry the same stigma” as an action for fraud.
3

The Second Circuit reasoned that “ERISA
and the securities laws ultimately havediffering objectives pursued under separate
statutory schemes designed to protect
different constituencies.” The court statedthat “[i]f plaintiffs do begin to abuse ERISA
in the way Congress felt they have abused
the securities laws, then Congress can amend
ERISA accordingly.”
The Second Circuit emphasized, however,that the dismissal of the securities fraud
action was not entirely irrelevant to plaintiffs’
ERISA action. While the court found plaintiffs“plausibly allege[d] that the Plan defendants
had the requisite knowledge of overvaluation
to raise fiduciary responsibilities,” the court
instructed that plaintiffs “may not allege
directly or indirectly that the Plan defendants
committed securities fraud.”

Seventh Circuit: SLUSA
Precludes State-Law-Based
Securities Fraud Class Actions
Even If the Proposed Class
Consists of Fifty or Fewer
Members
On January 24, 2019, the Seventh Circuit
held that the Securities Litigation Uniform
Standards Act (“SLUSA”) precluded a statelaw-based securities fraud class action
brought on behalf of a class consisting offewer than fifty proposed members.
Nielen-Thomas v. Concorde Inv. Svcs., 2019
WL 302766 (7th Cir. 2019) (Flaum, J.).
The Seventh Circuit found that “SLUSA’s‘covered class action’ definition includes any
class action brought by a named plaintiff
on a representative basis, regardless of the
proposed class size.” The court explained thatan “obvious implication” of its “interpretationis that no putative securities class actions

that are based on state law and otherwise
meet SLUSA’s requirements (they involve a
covered security, allege a misrepresentationin connection with that security, etc.) can
proceed in either federal or state court under
SLUSA.” In reaching its decision, the Seventh
Circuit emphasized that “Congress envisioned
a broad construction” of SLUSA. Id. (quoting
Merrill Lynch, Pierce, Fenner & Smith v.
Dabit, 547 U.S. 71 (2006)).
SLUSA provides that a “single lawsuit”
constitutes a “covered class action” if, interalia, “(I) damages are sought on behalf ofmore than 50 persons or prospective classmembers,” or “(II) one or more named parties
seek to recover damages on a representativebasis on behalf of themselves and otherunnamed parties similarly situated.” 15 U.S.C.
§ 78bb(f)(5)(B)(i). The court found that while“there is overlap between” Subparagraphs(I) and (II), “each subparagraph has aseparate meaning.” The court explainedthat “Subparagraph (I) includes in its scope
all actions brought by groups of more thanfifty ‘prospective class members,’” as well“single lawsuits brought by groups of morethan fifty ‘persons’ without any ‘prospective’or ‘representative’ caveat on their plaintiff
status.” Subparagraph (II), on the other
hand, “includes any action brought as aputative class action in the traditional Rule 23
meaning of the term.” The court determinedthat “Subparagraph (II) includes all putativeclass actions that otherwise meet the relevant
requirements in scope, regardless of the
proposed class’s size.”
The Seventh Circuit recognized that under
this construction, “a putative class actionin which the proposed class exceeds fifty
members could be ‘covered’ under both
Subparagraph (I) and Subparagraph (II).”
The court noted that “this redundancy is not
unusual or problematic.” The court explainedthat “this reading gives separate effect toboth subparagraphs so that each covers
something the other does not.” SubparagraphI encompasses lawsuits brought on behalf ofmore than fifty plaintiffs that are not styled
as class actions. Subparagraph II “includes
all putative class actions with fifty or fewer
proposed class members.”
The Seventh Circuit reasoned thatinterpreting SLUSA to “preclude all [statelaw-based securities fraud] actions broughtusing the class-action device, not just classes
4alleged to include more than fifty people,”comports with “SLUSA’s enactment history
and legislative purpose.”8 The court explainedthat “Congress passed these amendments
to combat a specific problem—litigants
were attempting to circumvent the PSLRA’s
barriers to federal securities class actions
by filing their class actions under state law
instead.” The Seventh Circuit explained that“[t]his purpose could be easily frustrated
if plaintiffs bringing a state-law securities
class action could simply allege that they
represented a class of no more than fifty
people.” Absent SLUSA preclusion, “suchsuits could proceed through the courts
until discovery identified the entire classof plaintiffs.” If it turned out that “theactual class could include more than fifty
persons, . . . by that time the abuses that the
PLSRA sought to prevent would have alreadytaken place.”

Tenth Circuit: Pursuant to
Section 929P(b) of the DoddFrank Act, the Conduct andEffects Tests Govern the
Extraterritorial Reach of SEC
Enforcement Actions
On January 24, 2019, the Tenth Circuit heldthat the conduct and effects tests codified
in Section 929P(b) of the Dodd-Frank Act
govern the extraterritorial reach of SEC
enforcement actions brought under Section
10(b) of the Exchange Act and Section 17(a)of the Securities Act. SEC v. Scoville, 2019
WL 302867 (10th Cir. 2019) (Ebel, J.).
Enacted less than a month after the Supreme
Court’s decision in Morrison v. National
Australia Bank, 561 U.S. 247 (2010), Section
929P(b) amended the Exchange Act and the
Securities Act to provide that district courts
have jurisdiction over extraterritorial SEC
enforcement actions brought under Section
10(b) of the Exchange Act or Section 17(a) of
8. The Seventh Circuit acknowledged that there have been“statements by both the Supreme Court and the Seventh
Circuit indicating that class actions brought on behalf of fewer
than fifty persons are not covered by SLUSA.” For instance,
in Cyan v. Beaver County Employees Retirement Fund,
138 S.Ct. 1061 (2018), the Court stated that “[a]ccording to
SLUSA’s definitions, the term ‘covered class action’ means aclass action in which ‘damages are sought on behalf of morethan 50 persons.’” The Seventh Circuit found that thesestatements were all dicta because “[t]he Supreme Court andthe Seventh Circuit in these cases did not have the opportunity
or need to opine on the contexts in which Subparagraphs (I)or (II) could apply.”

the Securities Act if the conduct and effects
tests are met.9
Prior to the Morrison decision, courts applied
the conduct and effects tests to determine
whether they had jurisdiction to hear
extraterritorial securities fraud actions. The
Morrison Court found that the extraterritorial
reach of Section 10(b) is a merits question
rather than a jurisdictional question. The
Morrison Court determined that Section
10(b) does not apply to extraterritorial
securities fraud actions, and repudiated the
conduct and effects tests. The Court instead
held that Section 10(b) applies only to“transactions in securities listed on domestic
exchanges, and domestic transactions in othersecurities.”
On March 28, 2017, the District of Utahfound that Morrison does not limit theextraterritorial reach of SEC enforcement
actions brought under Sections 10(b) and/or
17(a). SEC v. Traffic Monsoon, 245 F. Supp.
3d 1275 (D. Utah 2017). The court stated that
Section 929P(b) reflected “a congressional
intent that, in actions brought by the SEC,
Sections 10(b) and 17(a) should be applied to
extraterritorial transactions to the extent thatthe conduct and effects test can be satisfied.”
The court acknowledged that “the plain
language of Section 929P(b) did not explicitly
9. Section 929P(b) of the Dodd-Frank Act added the following
language to both the Exchange Act and the Securities Act:The district courts of the United States and the UnitedStates courts of any Territory shall have jurisdiction ofan action or proceeding brought or instituted by theCommission or the United States alleging a violation of[either Section 10(b) of the Exchange Act or Section 17(a) of
the Securities Act] involving—(1) conduct within the United States that constitutes
significant steps in furtherance of the violation, even if the
securities transaction occurs outside the United States andinvolves only foreign investors; or(2) conduct occurring outside the United States that has aforeseeable substantial effect within the United States.
15 U.S.C. §§ 77v(c) (Securities Act), 78aa(b) (Exchange Act).
5

overturn the core holding of Morrison.”
However, the court assumed that thisomission was due to the fact that “Morrison
was issued too late in the legislative process toreasonably permit Congress to react to it.” Thecourt also deemed it immaterial that Section
929P(b) addressed only the jurisdiction offederal courts to hear extraterritorial SEC
securities fraud enforcement actions, rather
than the substantive reach of Sections 10(b)and 17(a). The court reasoned that “theprevailing view of the law prior to Morrison
was that satisfying the conduct and effects
test was essential to the jurisdiction of a court
to adjudicate a dispute arising under Section
10(b).” The court explained that it did “notpresume that Congress intended Section
929P(b) to be a nullity.”
In Scoville, the Tenth Circuit affirmed theDistrict of Utah’s decision. The Tenth Circuit
found it “clear that Congress affirmatively
and unmistakably directed that” the antifraud
provisions of the securities laws “apply
extraterritorially in an enforcement action.”
Although Section 929P(b) addressed “thejurisdictional provisions of the securities
acts,” the Tenth Circuit determined that
“Congress undoubtedly intended that thesubstantive antifraud provisions should apply
extraterritorially when the statutory conductand-effects test is satisfied.” The Tenth Circuit
based this conclusion on “the context andhistorical background surrounding Congress’s
enactment of those amendments,” including
the title of Section 929P, Strengthening
Enforcement by the Commission.
Applying Section 929P(b) to the case before
it, the Tenth Circuit found that the SEC could
bring an enforcement action under Sections
10(b) and 17(a) because the defendant“conceived and created” the relevant entity
in the United States, and “created andpromoted” the relevant investments while

residing in the United States. The court also
noted that the servers hosting the website of
the entity at issue were located in the UnitedStates.

Middle District of Tennessee:
Denies Class Certification
Where Defendants Rebutted
the Basic Presumption of
Reliance With Evidence ofLack of Price Impact
In Halliburton Co. v. Erica P. John Fund,
573 U.S. 258 (2014), the Supreme Court
held that although “plaintiffs need not
directly prove price impact to invoke the
Basic presumption” of classwide reliance,
defendants may “defeat the presumption at
the class certification stage through evidence
that the misrepresentation did not in fact
affect the stock price.” On January 18, 2019,
the Middle District of Tennessee foundthat defendants successfully rebutted the
Basic presumption with evidence of lack ofprice impact. Grae v. Corrections Corp. ofAm., 2019 WL 266674 (M.D. Tenn. 2019)(Trauger, J.). The court further held thatplaintiffs could not invoke the AffiliatedUte presumption of reliance for omissions
because the “core” of plaintiffs’ allegations
concerned what the company “said, not what
it failed to say.” The court denied plaintiffs’
motion for class certification on the grounds
that individual questions of reliance would
predominate over common questions.

Plaintiffs Cannot Demonstrate
Price Impact Based on the
Materialization of a Risk If theMarket Was Already Aware of That
Risk
At issue in the case before the court were
allegations that a private prison operator
and its executives failed to disclose quality
issues with its contract prisons. On August
11, 2016, the DOJ’s Office of Inspector
General issued a report (the “OIG Report”)
detailing significant quality concerns with
contract prisons, including prisons operated
by defendants. The OIG Report had no
impact on the company’s stock price. A week
later, the Deputy Attorney General issued amemorandum (the “Yates Memorandum”)
6

recommending that the federal government’s
Bureau of Prisons (“BOP”) begin “reducing—and ultimately ending—[its] use of privately
operated prisons.” Through competing
expert analyses, the parties disputed whether
the stock price drop following the releaseof the Yates Memorandum demonstrated
that the alleged misrepresentations had any
price impact.
At the outset of its analysis, the courtemphasized that “the Supreme Court hasleft little doubt that the court must consider
evidence of a lack of price impact as a basis
for overcoming the Basic presumption at theclass certification stage.” The court found “thepresence of the OIG Report complicate[d]the issue of price impact considerably.”
The court explained that “[i]f the market
learns the truth about an underlying risk to
a company prior to the risk’s materializing,then materialization has no concealed truth
to reveal.” The court stated that “[t]he valueof the company’s shares still might go down—
but that reduction in value would be due tothe damage done by the materialized risk
itself, not the market’s having been in thedark about the risk’s existence or severity.”
The court determined that any investor who
read the OIG Report “would have been wellapprised of the fact that there was evidenceof significant quality issues with the BOP’scontract prisons, including, specifically,”
defendants’ prisons. The court concluded
that “[t]here was no concealed truth, then,left for the Yates Memorandum to disclose.”
The court found that “[a]ll that the [Yates]
Memorandum revealed was the ensuingpolicy decision.” The court therefore heldthat plaintiffs could not rely on the stock
drop following the Yates Memorandum todemonstrate price impact.
The court acknowledged that defendants’evidence was “not an ironclad demonstration,
beyond a reasonable doubt, that [thecompany’s] allegedly false or misleadingstatements and omissions had no priceimpact.” However, the court found theevidence “enough for [defendants] to prevailwith regard to whether the court [could] relyon the Basic presumption to simplify anduniversalize the issue of reliance.”

Plaintiffs Cannot Invoke theAffiliated Ute Presumption Because
the Complaint Alleged Misleading
Statements
Plaintiffs alternatively argued that theyshould be entitled to rely on the presumptionof reliance set forth in Affiliated Ute Citizens
v. United States, 406 U.S. 128 (1972). The
Affiliated Ute Court held that “positive
proof of reliance is not a prerequisite forrecovery” where plaintiffs’ claims “involv[e]primarily a failure to disclose.” Plaintiffs inGrae contended that their case centered on
the company’s “failure to disclose the many
deficiencies that led to the erosion of its
relationship with the BOP.”

The court explained that “the distinction
between misleading statements andmisleading disclosures is not always crystal
clear, because, in the securities fraud context,
it is often what one says that determines
whether one has an obligation to disclose.”
The court found that “[t]here is . . . a tension
between the test for determining whether adefendant had a disclosure obligation andthe test for whether to apply Affiliated Ute.”
This is because “[t]he disclosure case law
looks at statements and omissions together,as complementary parts of a single truth orfalsehood.” Application of the Affiliated Ute
presumption, on the other hand, “requires
the court to pick one or the other—to decide
whether a case is ‘primarily’ about statements
or about omissions—even if a case may, ina sense, be wholly about both.” The court
concluded that “[t]he only way out of thisseeming conundrum . . . is to construe
the scope of Affiliated Ute narrowly, or, atleast, narrowly enough to avoid creating an
exception that swallows the rule.”
Here, the court found that the complaint
was “replete with allegations of specific7false or misleading statements.” The court
acknowledged that the company “could haveinoculated itself by disclosing more accurate
information about the many deficiencies”
concerning its contract prisons. However,the court stated that “[s]ome version of thatpremise . . . is true about every affirmative
falsehood—every lie can be corrected by thetruth.” The court reasoned that any “versionof Affiliated Ute that reached this case would
be so broad that it would threaten the viabilityof reliance as an element of securities fraud
altogether” and “would not be consistent withthe limited purpose of the rule recognized by
the Supreme Court.”
The court emphasized that its rulingshould not be read as a determinationthat defendants were “forthright in theirstatements about the quality of theirfacilities.” Rather, defendants had “merely
shown that, based on the Supreme Court’scurrent case law regarding reliance insecurities fraud cases, the situation at issue
here is one for which reliance must be shown
individually, rather than collectively.”This edition of the
Securities Law Alert was edited by
Susannah S. Geltman
sgeltman@stblaw.com / +1-212-455-2762,
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
and Jonathan K. Youngwood
jyoungwood@stblaw.com / +1-212-455-3539.

8

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

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

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
9SimpsonThacherWorldwide

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SOUTH AMERICANew York
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