Securities Law Alert
In This Edition:• Second Circuit: Acquirer Shareholders Lacked Standing to Sue a Merger Target Under Section 10(b)Because They Never Bought or Sold the Target’s Shares• Second Circuit: Vacates Class Action Dismissal Concluding That the District Court Misinterpreted
the Scope of a Forum Selection Clause and Attributed Undue Weight to a Foreign Country’s Interest• Southern District of New York: Defendant Company Did Not Act as an ERISA Fiduciary When It
Recommended Defined Contribution Plan Participants Roll Over Assets Into Its Managed AccountService• Southern District of New York: Dismisses Class Action Alleging That a Drug Company Failed toDisclose Drug Trial Information
October 2022

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Second Circuit: Acquirer
Shareholders Lacked Standing
to Sue a Merger Target Under
Section 10(b) Because They
Never Bought or Sold theTarget’s Shares
On September 30, 2022, the Second Circuit
affirmed a district court’s dismissal of aputative securities fraud class action broughtby shareholders of a U.S. company that
acquired a non-U.S. target company, alleging
that the target made misstatements about
itself in advance of the merger in violationof Section 10(b). Menora Mivtachim Ins. v.
Frutarom Indus., 2022 WL 4587488 (2d Cir.
2022) (Park, J.). Creating a bright-line rule,
the Second Circuit held that plaintiffs lacked
standing under Section 10(b) to sue the target
because plaintiffs had bought shares of theacquirer, not shares of the target.

Background and Procedural History
Plaintiffs alleged that for several years
before the merger, executives at the target
bribed key employees of important clients togenerate business and bribed foreign import
officials. Plaintiffs alleged that in the lead
up to the merger, the target made materiallymisleading statements about the sourcesof its business growth and its compliancewith anti-bribery laws. After the acquisition
closed the target became a wholly-owned
subsidiary of the acquirer. Several months
later, the acquirer acknowledged that thetarget had “made improper payments torepresentatives of a number of customers”
and the acknowledgment was followed by astock drop.
Plaintiffs sued the acquirer, two of its officers,
the target, and five of its officers, alleging
that they made materially misleading
misstatements in violation of Section 10(b).
The Southern District of New York granteddefendants’ motion to dismiss, findingthat the complaint failed to allege withthe requisite particularity that the target’s
misconduct continued into the class period.1
The district court concluded that, “in any
case, the allegedly false statements andomissions of material fact were not actionable
or material” and that “plaintiffs lack statutory
standing under Section 10(b) to bring claims
against the [target] defendants for statements
made about [the target].” Plaintiffs appealed
the decision only against the target andcertain of its officers.

Acquirer Shareholders Lack
Standing to Sue a Target Company
Under Section 10(b)The Second Circuit began its analysis bydiscussing Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723 (1975), where theSupreme Court adopted the “purchaser-sellerrule” from Birnbaum v. Newport Steel Corp.,
193 F.2d 461 (2d Cir. 1952). The rule “requires
plaintiffs to have bought or sold a securityof the issuer about which a misstatement
was made in order to have standing to sue
under Section 10(b).” In Blue Chip Stamps,
the Court expressed concern that to holdotherwise would lead to vexatious litigation
and warned against permitting “endless caseby-case erosion” of the rule in the future.
Plaintiffs argued that as acquirer
shareholders, they had standing because
there was a “sufficiently direct relationship”
between the target’s misstatements about
1. The class period ran from the time of the merger
announcement to approximately one week after the acquirer’s
stock price drop.

itself and the price of the acquirer’s shares.
However, the Second Circuit rejected thisargument as meritless, explaining that
judicially created private rights of action
should be narrowly construed. The Second
Circuit refused to adopt plaintiffs’ “direct
relationship” test stating that doing so would
begin the erosion of the purchaser-seller rule.
Further, the Second Circuit observed thatsuch a test would cause courts to engage ina “shifting and highly fact-oriented” inquiry
requiring them to determine whether there
was a sufficiently direct link between one
company’s misstatements and anothercompany’s stock price. The Second Circuit
concluded that, in this case, plaintiffs lacked
statutory standing to sue the target because
they bought shares of the acquirer not thetarget.

Second Circuit: Vacates Class
Action Dismissal Concluding
That the District Court
Misinterpreted the Scope of a
Forum Selection Clause andAttributed Undue Weight to a
Foreign Country’s Interest
On August 26, 2022, the Second Circuit
vacated and remanded a district court’s
dismissal of a lawsuit, on the ground offorum non conveniens, challenging a goingprivate merger involving the defendant
e-commerce company and the purchase of
its outstanding publicly-traded American
Depositary Shares (“ADSs”) by the company’scontrolling shareholders. Fasano v. Guoqing
Li, 47 F.4th 91 (2d Cir. 2022) (Kearse, J.).
The Second Circuit held that the district court
gave the forum selection clause2 at issue anunwarrantedly narrow interpretation causing
it to undercount the defendants who should
be covered by it and that the district court
erred in weighing the public interest factors.
2. The forum selection clause provides, in relevant part, “Anycontroversy, claim or cause of action brought by any party
hereto against the Company arising out of or relating to the
Shares or other Deposited Securities, the American Depositary
Shares, the Receipts or the Deposit Agreement, or the breach
thereof shall be settled by arbitration . . . however, that any
such controversy, claim or cause of action relating to or based
upon the provisions of the Federal securities laws of theUnited States . . . shall be submitted to arbitration if, but only
if, so elected by the claimant.”2

Background and Procedural History
The company, incorporated in the Cayman
Islands, became publicly traded in 2010
with its shares trading as ADSs on the
NYSE, covered by a deposit agreement
containing a forum selection clause requiring
arbitration of certain disputes. In 2015,
the company’s CEO/founder led a groupof allegedly controlling shareholders3that proposed a going-private merger byoffering to buy out the company’s minority
shareholders. The going-private merger
closed in 2016. Subsequently, plaintiff
former owners or holders of the company’s
ADSs commenced a putative class action
against the company and its controllingshareholders challenging the merger andalleging negligent misrepresentation, breachof fiduciary duty, and federal securities
claims under Sections 10(b), 13(e), and 20(a)of the Exchange Act. The Southern Districtof New York determined that the forum
selection clause only applied to the claims“relating to or based upon” federal securities
law—not the negligent misrepresentation
and breach of fiduciary duty claims—andthat only the company was a signatory to
the deposit agreement, therefore, many of
the codefendants were not subject to theforum selection clause. The district court
further held that the public interest factors
favored dismissal on the ground of forum nonconveniens because the forum selection clause
was applicable to only half of plaintiffs’ claims
and to only five of the 13 named defendants.

It Was Reasonably Foreseeable Thatthe “Buyer Group” Would Be Boundby the Forum Selection ClauseOn appeal, the Second Circuit concluded
that the district court erred: (i) by giving theforum selection clause an unwarrantedly
narrow interpretation, thereby undercounting
the non-signatory defendants who should becovered by the forum selection clause; and(ii) in weighing the public interest factors.
As to the district court’s conclusion thatcertain defendants could not have foreseen
being bound by the forum selection clause,the court stated that the lower court’s“unduly narrow” focus on the issuance of
3. Aside from the company’s CEO/founder, this group included
certain officers or directors of the company, its parent
company, and three British Virgin Island entities that were
controlled by the CEO/founder.

the company’s ADSs (rather than the ADSs
themselves or their alleged confiscation)“infected its conclusion as to what parties theForum Selection Clause covers.” Weighing
defendants’ connection to the subject matterof the action, and the propriety of finding
the forum selection clause was applicable tothem, the Second Circuit found it persuasivethat these defendants were in the buyer groupthat caused plaintiffs’ ADSs to be eliminatedand that the proxy statement repeatedly
stated that they would be subject to thedeposit agreement’s terms and conditions.
The court concluded that “it was reasonably
foreseeable to any member of the ‘Buyer
Group’ that they would be subject to theunderlying deposit agreement, and therefore
its Forum Selection Clause.”

The Public Interest Factors
Did Not Justify a Forum-NonConveniens Dismissal
The Second Circuit also concluded that the
public interest factors could not justify aforum-non-conveniens dismissal. As to the
district court’s conclusion that dismissal was
warranted because only half of plaintiffs’
claims were covered by the forum selection
clause, the Second Circuit indicated that it
appeared that the district court was seeking
to avoid bifurcation of the case. However, theSecond Circuit stated that it was not possible
to avoidance bifurcation if plaintiffs insistedon their rights under the deposit agreement tohave their federal securities claims litigated incourt because the deposit agreement required
all of their other claims to be submitted toarbitration.

Cayman Islands Has No Genuine
Interest In Adjudicating U.S.
Federal Securities Claims
The Second Circuit also concluded thatwhile plaintiffs’ common-law claims werelikely governed by Cayman Islands law
because the company was incorporated
there, a forum-non-conveniens dismissal
could not serve the Cayman Islands’ interestin having those claims “decided at home”
because the deposit agreement required
those claims to be submitted to arbitration in
New York. The court reasoned that because
plaintiffs’ common-law claims could only
be pursued in a New York arbitration, if
3the forum-non-conveniens dismissal stoodthen the only claims to be determined in
the Cayman Islands would be the federal
securities claims. The Second Circuit statedthat it could not see any genuine interestof the Cayman Islands in adjudicating suchclaims, in contrast to the U.S., which thecourt stated has a vital interest in having its
own courts decide an unsettled securities
law question (namely, whether Section 13(e)implies a private right of action).

account service, allowing the company to earnhigher fees. However, plaintiffs alleged that
Portfolio Advisor had higher fees but did notconsistently perform better than employersponsored plans. Plaintiffs commenced
this putative class action asserting that thecompany acted as an ERISA fiduciary bysoliciting them into the Portfolio Advisor
program. The company sought dismissal,
arguing that it was not an ERISA fiduciaryand as such could not have breached any
fiduciary duties.

Southern District of New York:Defendant Company Did Not
Act as an ERISA Fiduciary
When It Recommended
Defined Contribution Plan
Participants Roll Over Assets
Into Its Managed AccountService

The Court Weighs Whether theCompany Was a Functional
Fiduciary Under ERISAOn September 27, 2022, the Southern Districtof New York dismissed with prejudice aputative class action alleging that a financial
services company and its subsidiary (together,“the company”) violated the Employee
Retirement Income Security Act (“ERISA”),
by inducing plaintiff participants in employersponsored defined contribution retirement
plans to transfer assets from these plans tothe company’s managed account service.
Carfora v. Tchrs. Ins. Annuity Ass’n of Am.,
2022 WL 4538213 (S.D.N.Y. 2022) (Failla, J.).
The court held that plaintiffs failed to allege
that the company acted as a fiduciary whenrecommending rollovers, finding that, among
other things, plaintiffs failed to plead facts
demonstrating that the company renderedinvestment advice on a regular basis tothe plans.

BackgroundThe company provided plaintiffs’ employersponsored plans with various administrativeand investment related services while also
running an individual advisory business in its
capacity as a broker-dealer and investment
advisor. Plaintiffs alleged that the company
encouraged them to roll the money fromtheir defined contribution plans over into thecompany’s “Portfolio Advisor,” a managed

The court explained that ERISA and its
regulations lay out two avenues throughwhich one can become a plan fiduciary subject
to its statutory duties: either as a named
fiduciary in the plan’s written instrument or
as a de facto, functional fiduciary. Because
plaintiffs acknowledged that the company was
not a named fiduciary, the court considered
whether the company could be considered afunctional fiduciary. ERISA provides that, “aperson is a fiduciary with respect to a plan
to the extent he renders investment advice
for a fee . . . with respect to any moneys
or other property of such plan, or has any
authority or responsibility to do so.” 29 U.S.C.
§ 1002(21)(A)(ii). The court stated that it
would consider, among other things, therelevant statutory and regulatory provisionsof ERISA, including the five-part investment
advice test4 promulgated by the Departmentof Labor in 1975, to determine whether thecompany was a functional fiduciary during therelevant time period.

Two to Three Interactions Was
Insufficient to Constitute Providing
Advice on a Regular BasisAs to whether the company provided“investment advice” on a “regular basis”
under the five-part investment advice test,
the court concluded that it did not. The court
4. The test is used to determine who qualifies as an “investment
advice” fiduciary under the functional fiduciary statutory
provision, stating that, “To plead that a defendant is a fiduciary
because it provided investment advice for a fee in satisfactionof 29 U.S.C. § 1002(21)(A)(ii), a plaintiff must plead that(i) the defendant provided individualized investment advice;(ii) on a regular basis; (iii) pursuant to a mutual agreement,
arrangement, or understanding that (iv) the advice would serve
as a primary basis for the plan’s investment decisions; and(v) the advice was rendered for a fee.”4explained that to provide advice on a “regularbasis,” there must have been some numberof instances in which advice was provided.
However, the court found that plaintiffs’
allegations of two to three interactions was“clearly insufficient.” The court determinedthat the company’s consultative sales process5
did not constitute advice on a “regular basis”
in a strictly numerical sense given the limited
number of actual interactions with plan
participants prior to the rollover decision.
The court also pointed out that this limited
number of actual interactions was related
only to one investment decision, which was
the roll over. According to the court, the term
“regular basis” should not be considered asa mere quantitative inquiry, but could also
be “understood in the context of routinely
providing plans with investment advice on avariety of decisions.” The court reasoned that“[t]he plain meaning of ‘regular’ runs counterto advisement related to a one-time decision,even if this decision is a consequential one.”trials in violation of Section 10(b) of the
Exchange Act. In re AstraZeneca plc Sec.
Litig., 2022 WL 4133258 (S.D.N.Y. 2022)(Oetken, J.). The court held that plaintiffs
failed to identify any misleading statement,
determining that the challenged statements
were not actionable because they “merely
recite historical fact.” The court disagreed
that the challenged statements weremisleading—on the ground that they createdthe impression that the trials were producing
positive results and experienced no significant
setbacks—stating that there is no generalized
duty to disclose negative facts.

Aggregate Roll-Over
Recommendations Did Not
Constitute Advice on a Regular BasisAs to plaintiffs’ contention that all of thecompany’s interactions with various plan
participants in the aggregate could constituteregular investment advising, the court
determined that this was “not supported in
the caselaw, and indeed is contradicted by thestatutory text and prevailing regulations.”

Southern District of New York:
Dismisses Class Action
Alleging That a Drug Company
Failed to Disclose Drug Trial
Information
On September 12, 2022, the Southern Districtof New York dismissed with prejudice aputative securities fraud class action alleging
that a drug company that was developing
a COVID-19 vaccine failed to disclose
information about its Phase II/III clinical
5. During the consultative sales process, the company’s advisors
would cold-call participants in company-administeredemployer sponsored plans to offer free financial planning
services, the advisor would then meet with the participant,the advisor would create an individual financial plan based on
the meeting and have a follow-up meeting where the advisor
would pitch Portfolio Advisor.

In 2020, the company began to develop a
COVID-19 vaccine and conducted Phase II/
III clinical trials. Plaintiffs alleged that thecompany failed to disclose, among otherthings, that some trial participants received
half doses, that the clinical trials sufferedfrom widespread flaws in design, errors inexecution, that the clinical trials did not
follow applicable protocols and guidelines,
and that as a result the drug was unlikely to
be approved for commercial use in the U.S.
Plaintiffs commenced this action after a seriesof stock drops that were allegedly caused byvarious corrective disclosures. Defendants
moved to dismiss under Federal Rules of Civil
Procedure 8, 9(b), and 12(b)(6), as well as
the PSLRA.
After concluding that the complaint failed
to identify any misleading statement under
Section 10(b), the court further determinedthat the complaint should be dismissed“under the PSLRA because it falls shortof the PSLRA’s ‘particularity threshold.’”
Explaining that the PSLRA obligates a5plaintiff to “demonstrate with specificity why
and how” each statement is materially false or
misleading, the court held that the complaint
did not adequately do so. The court pointed
out that the complaint merely identified
various defendant statements and repeateda “copy-and-pasted list of omissions.” Citing
In re Alcatel Sec. Litig., 382 F. Supp. 2d 513(S.D.N.Y. 2019), the court stated that suchallegations did not specify why and how eachstatement was misleading because they do not
specify what understanding each statement
left investors, and how that understanding
was inconsistent with alleged omissions.
The court further concluded that thecomplaint failed to state a claim “because
it does not identify any statement mademisleading by any alleged omission.” As
to plaintiffs’ claim that defendants failed
to disclose that some Phase II/III trial
participants received half doses; that somereceived late second doses; and that thetrial reflected “a patchwork of disparate
patient subgroups, each with subtly different
treatments” the court stated that “an omissionis actionable under the securities laws only
when the corporation is subject to a duty todisclose the omitted facts.” Stratte-McClurev. Morgan Stanley, 776 F.3d 94 (2d Cir.
2015). The court stated that plaintiffs “havenot identified any inaccurate, misleading, orincomplete statement relating to” the Phase
II/III dosing. As to company statements,
such as the one highlighting “the start of a
Phase II/III UK trial of AZD1222 in about

10,000 adult volunteers” the court statedthat plaintiffs “identified only accurate
statements describing the launch andhistorical progression of the Phase II/III
clinical trials.” Plaintiffs argued that thesestatements, even if literally truthful, were still
misleading. However, the court stated thatplaintiffs failed to allege “any relevant context
to create a misleading impression.” According
to the court, plaintiffs’ argument—that
the statements alone created a misleading
impression that the trials were proceeding
as expected, producing positive results,
and experiencing no significant setbacks or
unusual issues—was the same as stating thatthe absence of a negative disclosure gave
the impression that there were no negative
facts. The court cautioned that if this were
the standard then every omission would beactionable. Instead, the court explained,“there is no generalized duty to disclose
negative facts.” In re Philip Morris Int’l Inc.
Sec. Litig., 2021 WL 4135059 (S.D.N.Y. Sept.
10, 2021).
Plaintiffs also alleged that defendants put
the “conduct of the trials at issue” when theymentioned the Phase II/III trials because
under In re Vivendi Securities Litigation,
838 F.3d 223 (2d Cir. 2016) “once a company
speaks on an issue or topic, there is a duty
to tell the whole truth.” However, the court
disagreed finding that defendants’ statements
were “at such a high level of generality, andthe alleged omitted facts so granular, that
there is no violation of that principle here.”This edition of the
Securities Law Alert was edited by
Linton Mann III / +1-212-455-2654
lmann@stblaw.com
George S. Wang / +1-212-455-2228
gwang@stblaw.com andJanet A. Gochman / +1-212-455-2815
jgochman@stblaw.com

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