Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Address Whether: (1) American Pipe Tolling Applies to Section 13’s
Three-Year Statute of Repose, and (2) SEC Claims for Disgorgement Are Subject to Section 2462’s FiveYear Limitations Period• First Circuit: Companies Need Not Disclose “Every Conceivable Stumbling Block” That May Interfere with
Meeting Estimated Timelines• Ninth Circuit: CEO’s Failure to Comply with “Aspirational” Corporate Ethics Standards Does Not Give
Rise to a Claim for Securities Fraud Under Section 10(b) and Rule 10b-5• New York Appellate Division: Approves Nonmonetary Settlement of Verizon Shareholder Class Action,
and Expands the Colt Test for Evaluating a Proposed Nonmonetary Settlement of a Shareholder Class
ActionFebruary 2017

With “goldstandard status”
in securities litigation,
Simpson Thacher has a deep
bench of “litigators who are very
experienced in handling complex,
multi-faceted litigation involving
novel issues.”– Benchmark
Litigation 2016

Simpson Thacher & Bartlett LLPSupreme Court: Grants
Certiorari to Address
Whether: (1) American Pipe
Tolling Applies to Section
13’s Three-Year Statute of
Repose, and (2) SEC Claims
for Disgorgement Are Subject
to Section 2462’s Five-Year
Limitations Period
On January 13, 2017, the Supreme Court
granted certiorari to address two significant
questions involving the limitations periods
for securities claims. In California Public
Employees’ Retirement System v. ANZSecurities (No. 16-373) (CalPERS), theCourt will consider whether American Pipetolling applies to the three-year statuteof repose set forth in Section 13 of the
Securities Act of 1933. In Kokesh v. SEC (No.
16-529), the Court will determine whether
the five-year limitations period set forth in

28 U.S.C. § 2462 applies to SEC claims for
disgorgement.

Court Will Address Circuit Split on
Whether American Pipe Tolling
Applies to Section 13’s Three-Year
Statute of Repose
In American Pipe & Construction v. Utah,
414 U.S. 538 (1974), the Supreme Court heldthat “the commencement of a class actionsuspends the applicable statute of limitations
as to all asserted members of the class who
would have been parties had the suit been
permitted to continue as a class action.”
The Second Circuit has previously determinedthat American Pipe tolling does not apply
to Section 13’s three-year statute of repose,
which governs claims under Sections 11 and
12 of the Securities Act. Police & Fire Ret.
Sys. of Detroit v. IndyMac MBS, 721 F.3d 95(2d Cir. 2013) (IndyMac). The IndyMac courtemphasized that “statutes of repose create asubstantive right in those protected to be freefrom liability after a legislatively-determined
period of time.” Earlier this year, the Sixth
Circuit relied on IndyMac to find American
Pipe tolling inapplicable to statutes ofrepose, including Section 13. Stein v. Regions
Morgan Keegan Select High Income Fund,
821 F.3d 780 (6th Cir. 2016).
Both the Second and Sixth Circuits disagreed
with the Tenth Circuit’s decision in Joseph v.
Wiles, 223 F.3d 1155 (10th Cir. 2000), which
held that American Pipe tolling does in fact
apply to Section 13’s statute of repose. The
Tenth Circuit reasoned that “[s]tatutes ofrepose are intended to demarcate a periodof time within which a plaintiff must bringclaims or else the defendant’s liability is
extinguished.” The court found that in thecase before it, “the claim was brought within
this period on behalf of a class of which[plaintiff] was a member.” The Tenth Circuit
further stated that “[t]olling the limitations
period while class certification is pending
does not compromise the purposes of statutesof limitations and repose” because the filingof a class action places defendants “on noticeof the substantive claim as well as the number
and generic identities of potential plaintiffs.”
In CalPERS, the Court granted certiorari toaddress the question of whether “the filingof a putative class action serve[s], under theAmerican Pipe rule, to satisfy the three-yeartime limitation in Section 13 of the Securities
Act with respect to the claims of putativeclass members.”1

Several months later, the Tenth Circuit
expressly disagreed with the Eleventh Circuitand held that Section 2462 does not apply
to SEC claims for disgorgement. SEC v.
Kokesh, 834 F.3d 1158 (10th Cir. 2016). The
Tenth Circuit found that when “read in thecontext of government causes of action,”
the word “forfeiture” was intended to referto the historical meaning of that term: “anin rem procedure to take tangible property
used in criminal activity.” The Tenth Circuit
concluded that “[t]he nonpunitive remedy ofdisgorgement does not fit” in that category.2
The Supreme Court granted certiorari toreview the Tenth Circuit’s decision in Kokesh
to determine whether Section 2462 reaches
SEC claims for disgorgement.

First Circuit: Companies
Need Not Disclose “Every
Conceivable Stumbling Block”
That May Interfere with
Meeting Estimated Timelines
On January 9, 2017, the First Circuit heldthat “[t]he securities laws do not make it
unlawful for a company to publicize an
aggressive timeline or estimate for a proposed
action without disclosing every conceivable
stumbling block to realizing those plans.”
Ganem v. InVivo Therapeutics Holdings
Corp., 845 F.3d 447 (1st Cir. 2017) (Lipez, J.).

Pursuant to 28 U.S.C. § 2462, the SEC andother federal government entities may notbring any “action, suit or proceeding for theenforcement of any civil fine, penalty, or
forfeiture” more than five years after the claim
first accrued.

In the case before the court, plaintiffs
alleged that a spinal therapy company’s
statements concerning the projected
timeline for a preliminary human study werefalse and misleading because defendants
failed to disclose “the FDA’s conditions,recommendations, and requirement[s]”for that study. Plaintiffs contended that
the FDA’s guidance “inevitably prevented[the company] from following through on its
stated timeline.”

In SEC v. Graham, 823 F.3d 1357 (11th Cir.
2016), the Eleventh Circuit held that Section
2462’s limitations period applies to SEC
claims for disgorgement. The court reasoned
that disgorgement is a type of “forfeiture”
within the meaning of Section 2462.

The First Circuit found plaintiffs alleged nofacts demonstrating that defendants could
not comply with the FDA’s suggestions andrequirements “within the proposed timeline,
a necessary showing for the statements tohave been misleading when made.” The court

1. The Court had previously granted certiorari with respect to thissame question in IndyMac. However, the Court subsequently
dismissed the writ of certiorari as improvidently granted in lightof a pending settlement in the case.

2. Both the First Circuit and the D.C. Circuit have also held that
Section 2462 does not apply to SEC claims for disgorgement. See
SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008); Riordan v. SEC,
627 F.3d 1230 (D.C. Cir. 2010).

Court Will Address Circuit Split on
Whether Section 2462’s Five-Year
Statute of Limitations Applies to
SEC Claims for Disgorgement2explained that plaintiffs were “left only with
the inference that because, in retrospect, thetest lagged significantly behind the proposed
timeline, the timeline must have always been
impossible to achieve.” The First Circuit
rejected plaintiffs’ contention as an allegationof “fraud by hindsight.” The court explainedthat “while greater clairvoyance might have led[the company] to propose a more conservative
timeline, [the company’s] failure to make such
perceptions does not constitute fraud.”

Ninth Circuit: CEO’s Failure
to Comply with “Aspirational”
Corporate Ethics Code Does
Not Give Rise to a Claim
for Securities Fraud Under
Section 10(b) and Rule 10b-5
On January 19, 2017, the Ninth Circuit heldthat a CEO’s violation of the company’s ethics
code did not give rise to a claim for securities
fraud under Section 10(b) and Rule 10b-5 on
the grounds that corporate ethics codes are“inherently aspirational.” Retail Wholesale& Dep’t Store Union Local 338 Ret. Fund v.
Hewlett-Packard, 845 F.3d 1268 (9th Cir.
2017) (Christensen, J.).3 The court reasoned
that holding otherwise “could turn all
corporate wrongdoing into securities fraud.”

BackgroundThe case before the court concerned theCEO’s alleged misrepresentations regarding“the nature and scope of his relationshipwith” an independent contractor, as well as
the [alleged] falsification of company expense
reports for meals he had eaten with her.
These incidents ultimately led to the CEO’s
resignation.
Plaintiffs subsequently brought suit alleging
that the CEO’s misconduct rendered
the company’s ethics code materiallymisleading under Section 10(b) and Rule10b-5. The Ninth Circuit observed that“several provisions” of the ethics code were“inconsistent” with the CEO’s actions,
including representations that the company“maintain[s] accurate business records”
and “create[s] business records that
3. The Honorable Dana L. Christensen, Chief District Judge for
the U.S. District Court for the District of Montana, was sitting on
the Ninth Circuit by designation.

accurately reflect the truth of the underlying
transaction or event.” The court noted thatthe ethics code “contains similarly worded
statements regarding: honesty; cooperation
with investigators; using good judgment;[and] reporting misconduct.”

Aspirational Statements
Concerning Corporate Ethics
Cannot Be Objectively False
The Ninth Circuit stated that it has notpreviously “addressed how to determine
whether statements made in or about anethical code are actionable representations
if the ethical code is violated.” The court
approached the issue in the case before
it “by first analyzing falsity, to determine
whether an ethical code and statements
made about the code contain any
misrepresentations of fact, and then, if
there was a misrepresentation, determining
its materiality—that is, its significance tostockholder decisionmaking.”4
The Ninth Circuit next turned to the languageof the corporate code of conduct at issue.
The court explained that “a code of conduct
is inherently aspirational” and “expresses
opinions as to what actions are preferable, as
opposed to implying that all staff, directors,
and officers always adhere to its aspirations.”
The court found that statements in thecode of conduct in question were “vague,”“subjective,” and “not capable of objective
verification.” The court concluded thatthe corporate ethics statements could notconstitute affirmative misrepresentations
for Rule 10b-5 purposes. Notably, theNinth Circuit emphasized that a “contrary
interpretation” would be “simply untenable”
because it would allow plaintiffs to frame
virtually any claim of corporate wrongdoing
as a securities fraud violation.
The Ninth Circuit rejected plaintiffs’
contention that the “context” of the facts at
issue “transform[ed] what would otherwise
be aspirational into statements capable ofobjective verification.” The court statedthat “context more appropriately factors
into the question of whether an alleged
misrepresentation was material to investors,
4. The Ninth Circuit observed that “[w]here a complaint arises
from ‘soft information,’ such as representations of compliance,
the Sixth Circuit applies a wholly different analysis, consideringscienter alongside materiality to determine whether arepresentation is an actionable misrepresentation.” Id. (citing In
re Omnicare, Inc. Sec. Litig., 769 F.3d 455 (6th Cir. 2014)).
3

not into whether a statement itself could bea misrepresentation.”

Alleged Misrepresentations
in Corporate Ethics Codes Are
Not Material
After addressing the question of falsity, theNinth Circuit then considered whether the
alleged misrepresentations in the company’s
ethics code were material. The court foundit significant that the statements were
promulgated pursuant to SEC regulations.
The court determined that “[i]t simply
cannot be that a reasonable investor’s
decision would conceivably have been
affected by [the company’s] compliance with
SEC regulations requiring publication of
ethics standards.”

Publication of a Corporate Ethics
Code Does Not Trigger a Duty toDisclose Ethics Violations
The Ninth Circuit also found meritlessplaintiffs’ claim that the company had a duty
to disclose ethics violations by its CEO. The
court underscored that the ethics-related
statements in question were “transparently
aspirational.” The court found that“[t]he promotion of ethical conduct at [thecompany] did not reasonably suggest that
there would be no violations of the [corporate
code of conduct] by the CEO or anyoneelse.” In view of its finding that the ethics
statements “did not create an impressionof full compliance,” the court held that thecompany had no duty to disclose the “misuseof CEO authority and misbehavior” inviolation of those statements.

New York Appellate Division:
Approves Nonmonetary
Settlement of Verizon
Shareholder Class Action,
and Expands the Colt Test
for Evaluating a Proposed
Nonmonetary Settlement of a
Shareholder Class Action
In considering whether to approve proposedclass action settlements, New York courts
have long applied the five Colt factors: “thelikelihood of success, the extent of support
from the parties, the judgment of counsel, thepresence of bargaining in good faith, and thenature of the issues of law and fact.” Matterof Colt Indus. Shareholders Litig., 155 A.D.2d
154 (N.Y. App. Div. 1st Dep’t 1990), modified
on other grounds 77 N.Y.2d 185 (1991).
On February 2, 2017, the First Department of
the New York Appellate Division expanded
the Colt test to require consideration of two
additional factors when evaluating proposed
nonmonetary settlements of class action
litigation: “whether the proposed settlement
is in the best interests of the putative classas a whole, and whether the settlement
is in the best interest of the corporation.”
Gordon v. Verizon Commc’ns, 2017 WL
442871 (N.Y. App. Div. 1st Dep’t 2017)(Kahn, J.). The First Department applied
this enhanced test to find that court approval
was warranted for a proposed nonmonetary
settlement of shareholder class action
arising out of the acquisition of Vodafone
Group’s stake in Verizon Wireless by Verizon
Communications.

Courts Must Consider the BestInterests of the Shareholders andthe Corporation When Evaluating a
Proposed Nonmonetary Settlement
At the outset of its analysis, the First
Department observed that settlements ofshareholder class action litigation without
monetary awards to class members havebecome “increasingly disfavored” because
they often “provide[] minimal benefits either
to shareholders or to their corporations.”
The court noted that both Delaware and
New York courts have “call[ed] for the
drastic curtailment of such class action[settlements].” While “some commentators
4

Proposed Nonmonetary Settlementof the Verizon Shareholder Class
Action Meets the First Department’s
Enhanced Standard“Viewing in totality the five established
Colt factors and the two [new] factors,” theFirst Department held that the proposed
nonmonetary settlement of the Verizon
shareholder class action “meets the enhanced
standard” for court approval. The court foundthat “each of the five factors set forth … in Coltweighs in favor of the proposed settlement.”5have opined that recent decisions …
may signal the extinction of ‘disclosureonly’ settlements,” the First Department
stated that other commentators havesuggested that courts “take a more balanced
approach in evaluating nonmonetary classaction settlements.”
The First Department explained that “acourt conducting a settlement review in aputative shareholders’ class action has a
responsibility to preserve the viability of
those nonmonetary settlements that prove
to be beneficial to both shareholders andcorporations, while protecting against the
problems with such settlements recognizedsince Colt, in order to promote fairness toall parties.” The court found that in light of
the “changing circumstances and concerns
surrounding nonmonetary settlements ofclass actions” in the 25 years since the Colt
decision, “a revisiting of [the] five-factor Coltstandard [was] warranted in order to effect anappropriately balanced approach to judicial
review of proposed nonmonetary class action
settlements.”
The First Department “refine[d]” the Coltstandard to require consideration of two
additional factors. First, “the agreed-upondisclosures, corporate governance reforms
and any other forms of nonmonetary relief ina proposed settlement should be in the bestinterests of all of the members of the putativeclass of shareholders.” Second, “the proposed
settlement should be in the best interest of thecorporation.” The court made it clear that “thelack of a monetary or quantifiable benefit to
the corporation does not necessarily preclude
such a finding.”

The court then considered “whether the key
aspects of the proposed settlement would
benefit the Verizon shareholders.” The court
determined that the additional disclosures“provided some benefit to the shareholders.”6
However, the court found the “most beneficial
aspect of the proposed settlement to theshareholders … was its inclusion of a fairness
opinion requirement, mandating that in theevent that Verizon engages in a transaction
involving the sale or spin-off of assets of
Verizon Wireless having a book value of inexcess of $14.4 billion, Verizon would obtaina fairness opinion from an independent
financial advisor, or, in the case of a spinoff, financial advice from an independent
financial advisor.” The court found that“having such a corporate governance reformin place to safeguard the valuation of
corporate assets in the event of such a saleconstitutes a sufficient benefit to the putativeclass of shareholders as a whole to warrant
approval of the proposed settlement in thiscase, under the circumstances presented.”
Finally, the court addressed the questionof whether the proposed settlement was in
5. With respect to plaintiffs’ likelihood of success on the merits,
the court noted that “plaintiff withdrew her claims for monetarydamages upon recognizing that they would be difficult to proveat trial.” As to “the extent of support from the parties for the
proposed settlement,” the court noted that only 3 of Verizon’s
2.25 million shareholders filed objections to the settlement,
and fewer than 250 shareholders opted out. With respect tothe third and fourth factors, the court found that the parties
were represented by competent and experienced counsel, andthat good faith bargaining between the parties was presumed.
Finally, as to the fifth Colt factor (“the nature of the issues of law
and fact”), the court explained that the only remaining issue indispute was “whether respondents breached their fiduciary duty
by failing to make adequate disclosures to the shareholders in the
preliminary proxy statement.” The court found “[t]his issue wasmore expeditiously resolved by the negotiated settlement process,in which the parties had the opportunity to identify and agree
upon the areas in which further disclosure of information would
be appropriate.”
6. The First Department expressly disagreed with the trial
court’s determination that “additional information provided
to shareholders in a disclosure must contradict what has beenpreviously disclosed in order for the disclosure to be material.”
5

Verizon’s best interests. The court foundthe “proposed settlement would resolve theissues in this case in a manner that would
reflect Verizon’s direct input into the natureand breadth of the additional disclosures
to be made and the corporate governancereform to be included as part of the proposed
settlement.” Moreover, “by agreeing to thesettlement, Verizon avoided having to incur
the additional legal fees and expenses ofa trial.”The First Department concluded that“approval of the proposed settlement [was]warranted” and further found that “thebenefits to Verizon’s shareholders achieved byplaintiff’s counsel were sufficient to warrant
an award of attorneys’ fees.” The court
remanded the action to the trial court forconsideration of an appropriate fee award.

Justice Moskowitz, Concurring,
Expresses Her View That the
Majority Should Not Have
Expanded the Colt Test
In a concurring opinion, Justice Moskowitz
observed that “no party to this appeal …
argued that the existing five-favor Colt test isinadequate to the task of evaluating a classaction settlement,” and therefore “neither
party … had a chance to address” the court’s
new standard. Judge Moskowitz expressed
her view that the First Department “should
not [have] add[ed] a new factor to a longestablished test without giving the parties theopportunity to brief the matter.” Instead, she
stated that the court should have “approve[d]the proposed class settlement under the
rubric of the existing five-factor Colt test.”

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

6

New York

Los Angeles

Paul C. Curnin+1-212-455-2519
pcurnin@stblaw.com

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

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

Michael J. Garvey+1-212-455-7358
mgarvey@stblaw.com

Thomas C. Rice
+1-212-455-3040
trice@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

Mark J. Stein+1-212-455-2310
mstein@stblaw.com

Palo AltoPaul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

David J. Woll
+1-212-455-3136
dwoll@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

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

Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com

Washington, D.C.
Peter H. Bresnan+1-202-636-5569
pbresnan@stblaw.com
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

The contents of this publication are for informational purposes only. Neither this publication nor the
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.
7SimpsonThacherWorldwide

UNITED STATESEUROPE

SOUTH AMERICANew York
425 Lexington Avenue
New York, NY 10017+1-212-455-2000

LondonCityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

Houston
600 Travis Street, Suite 5400
Houston, TX 77002+1-713-821-5650
Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500
Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000
Washington, D.C.
900 G Street, NW
Washington, D.C. 20001+1-202-636-5500

ASIA

Beijing
3901 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999
Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Seoul
25th Floor, West Tower
Mirae Asset Center 1
26 Eulji-ro 5-gil, Jung-gu
Seoul 100-210
Korea+82-2-6030-3800
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
8