Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Consider Whether Plaintiffs Can Satisfy Fifth Third’s “More Harm
Than Good” Pleading Standard by Alleging That Delaying an Inevitable Disclosure Results in Greater
Stock Price Harm
• Fifth Circuit: (1) Grant of Stock Options Pursuant to an Employee Stock Option Plan Is Not a “Sale”
of Securities, and (2) Plaintiffs Cannot Impute One Corporation’s Knowledge to Another ThroughUnsubstantiated Allegations of a Joint Venture• Fifth Circuit: Plaintiffs Can Rely on Post-Statement Events to Demonstrate That a Statement Was False
When Made• Southern District of New York: Affiliated Ute Presumption of Reliance Applies to Market Manipulation
Cases• Delaware Chancery Court: Minority Stockholders Who Attempted to Disrupt the Company’s Operations
to Gain Control or Force a Sale Were Not Controllers with Fiduciary Duties to the Company• Connecticut Superior Court: Discovery Stay Pending a Motion to Dismiss Applies to State Court Actions
Brought Under the Securities Act of 1933
May/June 2019

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Supreme Court: Grants
Certiorari to Consider
Whether Plaintiffs Can
Satisfy Fifth Third’s “MoreHarm Than Good” PleadingStandard by Alleging That
Delaying an Inevitable
Disclosure Results in Greater
Stock Price Harm
In Fifth Third Bancorp v. Dudenhoeffer, 573
U.S. 409 (2014), the Supreme Court held thatin order “[t]o state a claim for breach of the
duty of prudence” against the fiduciaries ofan employee stock ownership plan (“ESOP”)

Simpson Thacher & Bartlett LLP“on the basis of inside information, a plaintiff
must plausibly allege an alternative actionthat the defendant could have taken thatwould have been consistent with the securities
laws and that a prudent fiduciary in the same
circumstances would not have viewed as more
likely to harm the fund than to help it.”1 On
June 3, 2019, the Supreme Court granted
certiorari to decide whether Fifth Third’s“‘more harm than good’ pleading standard
can be satisfied by generalized allegations
that the harm of an inevitable disclosure of analleged fraud generally increases over time.”
Ret. Plans Comm. of IBM v. Jander, No.
18-1165.

1. Please click here to read our discussion of the Supreme Court’s
decision in Fifth Third.

In Jander v. Retirement Plans Committeeof IBM, 910 F.3d 620 (2d Cir. 2018), theSecond Circuit held that Fifth Third’s “moreharm than good” pleading standard was met
where plaintiffs alleged that the disclosureof the overvaluation of one of the company’sbusiness divisions was “inevitable, because[the company] was likely to sell the business
and would be unable to hide its overvaluationfrom the public at that point.” The Second
Circuit reasoned that “[i]n the normal case,when the prudent fiduciary asks whether
disclosure would do more harm than good,
the fiduciary is making a comparison only tothe status quo of non-disclosure.” In the casebefore it, “however, the prudent fiduciary
would have to compare the benefits andcosts of earlier disclosure to those of later
disclosure—non-disclosure is no longer a
realistic point of comparison.”
The Second Circuit found plaintiffs adequately
alleged that “the eventual disclosure of apurported fraud causes reputational damage
that increases the longer the fraud goes on.”The court explained that “[a] reasonablebusiness executive could plausibly foreseethat the inevitable disclosure of longstanding
corporate fraud would reflect badly on thecompany and undermine faith in its future
pronouncements.” Moreover, the court foundit significant that plaintiffs cited economic
analyses in support of this proposition. The
court noted that “[w]hile these economic
analyses will usually not be enough on theirown to plead a duty-of-prudence violation,
they may be considered as part of the overall
picture.” The Second Circuit concluded
that “when a drop in the value of the stockalready held by the fund is inevitable, it is
far more plausible that a prudent fiduciary
would prefer to limit the effects of the stock’s
artificial inflation on the ESOP’s beneficiaries
through prompt disclosure.”
In contrast to the Second Circuit, the Fifthand Sixth Circuits have held that plaintiffs
cannot satisfy Fifth Third’s “more harm thangood” standard by alleging that delaying
disclosure always results in greater stock priceharm. In Martone v. Robb, 902 F.3d 519 (5thCir. 2018), the Fifth Circuit found insufficient
allegations that “the longer a fraud goes on,
the more damage it does to investors.” The
Fifth Circuit agreed with the district courtthat such a “generalized allegation” that
arguably “applies in virtually every fraudcase” does not meet Fifth Third’s pleading

standard under governing circuit precedent.
In Graham v. Fearon, 721 F. App’x. 429 (6thCir. 2018), the Sixth Circuit reached the sameconclusion with respect to nearly identicalallegations. The court observed that theUnited States made the same argument in its
amicus brief in Fifth Third. The United States
contended that “[i]t better serves the interestsof the plan participants if the fiduciaries
take immediate actions to . . . disclos[e] thematerial nonpublic information” since a“greater drop might well occur if correctionof the misrepresentations were delayed.” The
Sixth Circuit found that the Fifth Third Court“rejected that argument, albeit implicitly.”
The Sixth Circuit further reasoned that thecase in favor of early disclosure of negative
nonpublic information “does not accountfor the risk of market overreaction to such a
disclosure, resulting in a decline worse thanactually warranted.”
The Court will hear oral arguments and issue
a decision in Jander in October Term 2019.

Fifth Circuit: (1) Grant ofStock Options Pursuant to an
Employee Stock Option Plan
Is Not a “Sale” of Securities,and (2) Plaintiffs Cannot
Impute One Corporation’s
Knowledge to AnotherThrough UnsubstantiatedAllegations of a Joint Venture
On May 24, 2019, the Fifth Circuit affirmed
dismissal of an Enron-related securities fraud
action brought against the independently–
incorporated retail brokerage and investmentbanking arms of a major bank. Lampkin v.
UBS Fin. Servs., 2019 WL 2240568 (5th Cir.
2019) (Higginbotham, J.). The brokeragemanaged Enron’s employee stock option plan,
while the investment bank advised Enron on anumber of transactions. The Fifth Circuit heldthat the grant of stock options pursuant to theemployee stock option plan was not a “sale” ofsecurities, as required to state a claim under
Sections 11 and 12 of the Securities Act of 1933
(the “Securities Act”). The court reasoned
that “[t]he employees did not bargain for the
options and they were granted for no cash
consideration.” With respect to plaintiffs’2claims under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, theFifth Circuit found plaintiffs failed to allege
a joint venture between the brokerage andthe investment bank, and therefore thebrokerage had no duty to disclose to its clientsthe investment bank’s alleged knowledge ofEnron’s financial fraud.

Grant of Stock Options Pursuant
to a Compulsory Employee Stock
Option Plan Is Not a “Sale”
The Fifth Circuit explained that a sale ofsecurities is a prerequisite for a claim under
Sections 11 and 12 of the Securities Act, asboth provisions “expressly limit liability topurchasers or sellers of securities.” The court
noted that in International Brotherhoodof Teamsters, Chauffeurs, Warehousemen
and Helpers of America v. Daniel, 439
U.S. 551 (1979), the Supreme Court heldthat “‘participation in a noncontributory,
compulsory pension plan’ is not theequivalent of purchasing a security” because“the ‘purported investment is a relatively
insignificant part’ of the employee’s totalcompensation, and the decision to accept
and retain employment likely had only anattenuated relationship to the investment.”
Lampkin, 2019 WL 2240568 (quoting Daniel,
439 U.S. 551). Following the Court’s rulingin Daniel, the SEC issued a release clarifyingthat “plans under which an employer awards
shares of its stock to covered employees at no
direct cost to the employees” do not result in“sales” within the meaning of the Securities
Act.2
The Fifth Circuit recognized that,“[c]onsistent with the interpretations of
the SEC, courts have extended Daniel to
2. SEC Release No. 33–6188, 45 F.R. 8960 (Feb. 11, 1980).
The SEC later expressed its view that “the determination ofwhether a plan is a voluntary contributory one rests solely on
whether participating employees can decide at some point
whether or not to contribute their own funds to the plan.” SEC
Release No. 33–6281, 1981 WL 36298 (February 3, 1981).

compulsory and involuntary employee stock
option plans.” The court explained that“[a] hallmark of a voluntary plan is the abilityof the employee to make an investment
decision to acquire the stock options.” Thecourt noted that the key inquiry under Daniel
is “whether employees made an investment
decision that could be influenced by fraud
or manipulation.”
Applying Daniel, the Fifth Circuit held thatplaintiffs “failed to demonstrate that the
grant of Enron options amounted to the saleof a security,” as required for a Securities Act
claim. The court reasoned that “participationin the [plan] was compulsory and employees
furnished no value, or tangible and definableconsideration in exchange for the option
grants.” The court found that it was “of noconsequence” that plaintiffs “would eventually
make an affirmative investment decision—
whether to exercise the option or let it expire,”
since plaintiffs’ claims were “based explicitly
on the grant of the option, not the exercise ofthat option.”

Plaintiffs Failed to Allege the
Existence of a Joint Venture
Between the Brokerage and theInvestment Bank
Plaintiffs alleged that the brokerage and theinvestment bank “united in a joint venture”
that “owed a duty to its retail brokerageclients . . . to disclose information that Enronmanipulated and materially misstated its
financial results to the public.” According
to plaintiffs, “any material, nonpublic
information known to [the investment bank]
had to be disclosed by [the brokerage]”
because the bank “operated as a single, fully
integrated entity.”
The Fifth Circuit rejected plaintiffs’ joint
venture theory of liability. In so holding, thecourt found “persuasive” the reasoning in
Giancarlo v. UBS Financial Services, 725 F.
App’x. 278 (5th Cir. 2018), an unpublisheddecision involving the same defendants in adifferent Enron-related case. As in Giancarlo,
the Fifth Circuit found that “‘vague corporate
platitudes about integration as a firm’ areinsufficient to support a finding of joint
venture liability.” Id. (quoting Giancarlo,
725 F. App’x. 278). The Fifth Circuitemphasized that plaintiffs did not allege“that defendants shared profits or losses” or“that defendants had joint control or right of3

control over the joint venture,” as required
to establish the existence of a joint venture
under governing Delaware law. The court
further found that plaintiffs did not assert
any other theory pursuant to which it could“aggregate the actions and knowledge of the
defendant entities for purposes of assessing
liability.” The Fifth Circuit concluded thatplaintiffs failed to state a claim under Section
10(b) and Rule 10b-5 since there were no
allegations that either the brokerage orthe investment bank had both material
nonpublic information and a duty to disclosethat information.

Fifth Circuit: Plaintiffs Can
Rely on Post-Statement
Events to Demonstrate Thata Statement Was False WhenMade
On May 15, 2019, the Fifth Circuit
revived in part a securities fraud action
against a company that allegedly mademisrepresentations concerning its algorithm
for predicting and collecting insurance
reimbursements for medical procedures.
Masel v. Villareal, 2019 WL 2120536 (5th Cir.
2019) (King, J.). The court found plaintiffs
adequately pled the falsity of these statements
by alleging that the company “was ultimately
unable to collect on the overwhelming
majority of claims it billed.” The court
determined that “evidence of later events canprovide useful circumstantial evidence that agiven representation was false when made.”
The Fifth Circuit rejected defendants’contention that plaintiffs were “attempting
to prove fraud by hindsight by pointing tolater events in order to shed light on thetruth or falsehood of earlier statements.”
The court noted that “fraud–by–hindsightissues arise in the context of the scienterfactor, not the misrepresentation factor.” Thecourt explained that “[w]here, as here, therepresentation in question concerned an asset
or skill possessed by the defendant (here,
an algorithm), the defendant’s failure to
perform as promised casts doubt on whether
he possessed that skill in the first place.”
The court offered the example of a pianist
who “represents that he is well-trained andcommits to perform Gershwin’s Rhapsody inBlue at a concert some time in the future,” butthen “arrives unable to play even Chopsticks.”
The court noted that in that hypothetical, it is“highly unlikely that he was a talented piano
player to begin with.” Similarly here, the court
found the company’s eventual inability tocollect insurance reimbursements “allow[ed]for the plausible inference that . . . [thecompany’s owner] had no algorithm andtherefore misrepresented her capabilities
when she pitched her investment.”
The Fifth Circuit also deemed actionable thecompany owner’s representations that she
had the ability to generate $50,000 or more
per insurance claim, and that she typicallycollects 50% or more of accounts receivable.
The court determined that these statements
were not “nonactionable future predictions,”
as the district court had found, but instead“relate[d] to the present capabilities of [thecompany’s] algorithm.” The court explainedthat the statements “concern[ed] how thealgorithm could perform at the time thestatement was made” and “how the algorithm
had previously performed.”
The Fifth Circuit found plaintiffs adequately
alleged the company owner’s scienter withrespect to the algorithm–related statements
because these representations “were basedon metrics and information within her
own control.” The court explained that thecompany owner “had [allegedly] developed
this algorithm and used its previously,”and therefore “knew how and whether it
would work.”
Although the Fifth Circuit reversed dismissalof claims based on the algorithm-related
statements, the court affirmed dismissalof claims concerning the company’s
representations that it had “superior” billing
procedures and “could generate the highest
payouts” for the relevant insurance claims.
The court found plaintiffs did not allege “thatthe statements were false when made.” Thecourt explained that “although the payouts
generated by [the company] fell short of what[the company’s owner] represented, this does
not mean that these payouts were not ‘thehighest’ or that the billing procedures werenot ‘superior.’” The court found instructive
its prior decision in Employees Retirement
System v. Whole Foods, 905 F.3d 892(5th Cir. 2018).3 There, plaintiffs asserted
securities fraud claims based on a grocery
3. Please click here to read our discussion of the Fifth Circuit’s
decision in Whole Foods.
4retailer’s representation that its prices
were “competitive.” The Whole Foods court
found that even if the “prices were not ascompetitive as advertised, it need not followthat they were not competitive.”

Southern District of New York:
Affiliated Ute Presumption of
Reliance Applies to Market
Manipulation Cases
On May 28, 2019, the Southern Districtof New York held that plaintiffs asserting
market manipulation claims were entitledto the presumption of reliance for omissions
established in Affiliated Ute Citizens of
Utah v. United States, 406 U.S. 128 (1972),
because plaintiffs’ claims primarily involved
the alleged failure of stock exchanges (the“Exchanges”) to disclose certain services they
provided to high-frequency trading (“HFT”)
firms. In re Barclays Liquidity Cross andHigh Frequency Trading Litig., 2019 WL
2269929 (S.D.N.Y. 2019) (Furman, J.).
Defendants relied on the Ninth Circuit’s
decision in Desai v. Deutsche Bank Securities,
573 F.3d 931 (9th Cir. 2009), to argue that
the Affiliated Ute presumption does notreach market manipulation claims. In Desai,
the Ninth Circuit found that “manipulative
conduct has always been distinct fromactionable omissions.” The Ninth Circuit
reasoned that if “nondisclosure of adefendant’s fraud was an actionable omission,then every manipulative conduct case would
become an omissions case.” The Ninth Circuit
held that “the Affiliated Ute presumption ofreliance does not apply” if plaintiffs allege
only manipulative conduct.
The Barclays court “decline[d] to follow”
the Ninth Circuit’s decision in Desai. 2019
WL 2269929. The court noted that two othercourts in the Southern District of New York
have held that the Affiliated Ute presumption
applies to market manipulation claims.4 The
court stated that “what is important in thiscontext is . . . the rationale for” the AffiliatedUte presumption, which was designed for
4. In re UBS Auction Rate Sec. Litig., 2010 WL 2541166(S.D.N.Y. 2010) (finding the Affiliated Ute presumption
applied to plaintiffs’ “market manipulation claim” because“in large part, their claim consists of omissions”); In re IPO
Sec. Litig., 671 F. Supp. 2d 467 (S.D.N.Y. 2009) (reasoningthat “Affiliated Ute itself was a case based on manipulative
conduct”).

cases in which “no positive statements
exist” and “reliance as a practical matter is
impossible to prove.” The court explainedthat when deciding whether the Affiliated Ute
presumption applies, courts must “engage ina context-specific inquiry” by “analyzing thecomplaint to determine whether the offenses
it alleges can be characterized primarily asomissions or misrepresentations.”5
The Barclays court found this analysis“straightforward” in the case before it,“as the Second Circuit has already heldthat [p]laintiffs’ claim is premised on the
Exchanges’ failure to fully disclose how HFT
firms could use certain products and serviceson the Exchanges’ trading platforms.” Id.
(quoting City of Providence, Rhode Island
v. Bats Global Mkts., 878 F.3d 36 (2d Cir.
2017)). The court determined that theSecond Circuit had therefore “resolved thequestion [of] whether this case involves
primarily omissions in the affirmative.” The
Barclays court concluded that plaintiffs’
market manipulation claims fell “within
the category of cases to which the AffiliatedUte presumption may apply at this stage ofthe litigation.”

Delaware Chancery Court:
Minority Stockholders
Who Allegedly Attempted
to Disrupt the Company’s
Operations to Gain Control
or Force a Sale Were Not
Controllers with Fiduciary
Duties to the Company
On May 29, 2019, the Delaware Chancery
Court dismissed breach of fiduciary duty
claims brought by a company against
two minority stockholders who allegedly
embarked on “a bad faith campaign intended
solely to disrupt [the company’s] business
operations with the hopes that [they] could
gain control of [the company] or force a buyout of their interest in [the company].” Klein
v. Wasserman, 2019 WL 2296027 (Del. Ch.
2019) (McCormick, V.C.). The court found
5. In Waggoner v. Barclays, 875 F.3d 79 (2d Cir. 2017), theSecond Circuit held that the Affiliated Ute presumption
applies only “in cases involving primarily omissions,” and does
not reach cases where plaintiffs’ claims “are primarily basedon misstatements.” Please click here to read our discussion of
the Second Circuit’s decision in Waggoner.
5the complaint “does not adequately allege
facts sufficient to impose fiduciary duties on
the [minority stockholders] as controllers.”
The court recognized that “[s]ome theories
posit that chronic disruption could rise to thelevel of control,” but held that the allegationsin the case before it did “not support sucha holding.” The court found it significant
that the complaint “describes [the minority
stockholders] as on a ‘quest’ for control, notwielding control.”could themselves supply the particularoutcomes to support a theory of decisionspecific control.” Here, the company argued
that the minority stockholders exercised
control by, inter alia, influencing one of theboard members to “wield[ ] his contractual
blocking rights to foreclose capital infusions.”
The court found this allegation insufficient
to demonstrate control because the company
did not identify “any specific transactions
presented to or rejected by the Board.”

The court explained that even if a stockholder
does not own a majority of the company’s
shares, the stockholder may nevertheless be
considered a controller if the stockholder“exercises actual control . . . over the businessand affairs of the corporation.” Such actual
control can be shown to exist throughpleadings that a minority shareholder
controlled (i) the board generally or (ii) thedecision-makers with regard to a particulartransaction or decision. The court found thecomplaint did not allege that the minority
stockholders had general control over thecompany, as they “own a 20% voting interest,
do not hold any office or management
position at [the company], are not [company]
directors, and, at most, control one of three
Board members.”

However, the court declined to dismiss a
breach of fiduciary duty claim against thedirector who allegedly “acted in bad faithby placing the interests of the [minority
stockholders] above the interests of [thecompany].” The court found the complaintstated a claim against the director eventhough “the Board did not consummate anytransaction that [the director] demanded.”
The court found the complaint “pled harm”
to the company by alleging that the director’s
actions led to the resignation of company
employees and filing delays, and “caused
internal disruption and corporate instability.”

With respect to the “decision-specificcontrol theory,” the court explained that,“at a minimum, a plaintiff must identify adecision or transaction.” The court foundthe complaint was “vague as to the decisionor particular outcome that the [minority
stockholders] successfully achieved.” Thecourt observed that the minority stockholders“never achieved” their alleged “sole goal,”
which was “to monetize their individual
investment as soon as possible and obtain abuyout of their interests.”
The court noted that “[t]heoretically, actions
implementing aspects of a larger strategy

The court also declined to dismiss a claim
against the minority stockholders for aiding
and abetting the director’s breach of fiduciary
duty. The sole argument made by defendants
with respect to that claim was the failure toallege an underlying breach of fiduciary duty.
As discussed above, the court held that abreach of fiduciary duty claim had been pledagainst one director.

Connecticut Superior Court:
Discovery Stay Pending a
Motion to Dismiss Applies
to State Court Actions
Brought Under the Securities
Act of 1933
On May 15, 2019, the Connecticut Superior
Court held that the Private Securities
Litigation Reform Act’s discovery staypending a motion to dismiss applies to state
court actions asserting Securities Act claims.
City of Livonia Retiree Health and Disability
Benefits Plan v. Pitney Bowes, 2019 WL
2293924 (Conn. Super. Ct. 2019) (Lee, J.).
The court found that the relevant statute, 15
U.S.C. § 77z-1(b)(1), “is not ambiguous” and“its plain meaning compels the conclusion
6

that [it] . . . applies to actions commenced instate court under the Securities Act, as well assuch actions commenced in federal court.”
Section 77z-1(b)(1) provides that “[i]n any
private action arising under this subchapter,all discovery and other proceedings shall bestayed during the pendency of any motion
to dismiss . . . .” The court found that thephrase “[t]his subchapter” refers to the
Securities Act, which “confers concurrent
jurisdiction on state and federal courts.” Thecourt further determined that the phrase “anyprivate action arising under this subchapter”
encompasses actions commenced in state
court as well as federal court. The court foundit significant that a different provision of thesame statute—§ 77z-1(a)(1)—specifically statesthat it “shall apply to each private action
arising under this subchapter that is brought
as a plaintiff class action pursuant to theFederal Rules of Civil Procedure.” The court
reasoned that “[b]ecause 77z-1(b)(1) does notcontain the same language, the inference isstrong that it is not limited to actions . . . infederal court.”
The court also pointed out that in Cyan v.
Beaver County Employees Retirement Fund,
138 S. Ct. 1061 (2018), the Supreme Court
observed that the safe harbor provisions set
forth in 15 U.S.C. § 77z-2 “applied even whena [Securities] Act suit was brought in state

court.”6 The City of Livonia court noted thatone provision of that statute, § 77z-2(c)(1),also uses the phrase “in any private action
arising under this subchapter.” The court
found that “[b]ecause the Supreme Court
held that language identical to that at issue
here applies to both state and federal actionscommenced under the Securities Act, theinference is strong that Section 77-1(b)(1) was
meant to apply to actions pending in state
court as well as in federal court.” The court
also considered it noteworthy that § 77z-2,“which the Supreme Court expressly held
applies to state as well as federal actions, also
contains [a provision providing for] a stay of
discovery during the pendency of a motion
relevant to a determination of the merits of
the action.” See 15 U.S.C. § 77z-2(f) (providing
for a discovery stay pending a motion forsummary judgment).
Finally, the court rejected plaintiffs’
contention that “state law should govern
whether a stay of discovery is to be granted
because it is a procedural issue and not
a substantive one.” The court explainedthat it is “bound by the decision in Cyan
approving the application to a state court
action of a provision of the Securities Act
that stays discovery during the pendency of a
substantive pretrial motion.”
6. Please click here to read our discussion of the Supreme Court’s
decision in Cyan.

This edition of the
Securities Law Alert was edited byAlexis S. Coll-Veryacoll-very@stblaw.com / +1-650-251-5201,
Lynn K. Neuner
lneuner@stblaw.com / +1-212-455-2696,
Cheryl J. Scarboro
cscarboro@stblaw.com / +1-202-636-5529,
and George S. Wang
gwang@stblaw.com / +1-212-455-2228.

7

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Los Angeles

Brooke E. Cucinella+1-212-455-3070
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Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

Paul C. Curnin+1-212-455-2519
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Michael J. Osnato, Jr.
+1-212-455-3252
michael.osnato@stblaw.com

Chet A. Kronenberg+1-310-407-7557
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Stephen M. Cutler+1-212-455-2773
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Michael J. Garvey+1-212-455-7358
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George S. Wang
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Nicholas S. Goldin+1-212-455-3685
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Jonathan K. Youngwood+1-212-455-3539
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Stephen P. Blake+1-650-251-5153
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Alexis S. Coll-Very+1-650-251-5201
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jkreissman@stblaw.com
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Senior Counsel+1-650-251-5203
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Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
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cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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