Securities Law Alert
In This Edition:• First Circuit: Promises of Steak Dinners and Golf Outings Are Sufficient to Allege the Personal Benefit
Requirement for Insider Trading Liability in Tipping Cases Brought Under the Misappropriation Theory• Second and Eleventh Circuits: Constitutional Challenges to Pending SEC ALJ Proceedings Are Premature• Sixth Circuit: A Corporate Executive’s State of Mind May Only Be Imputed to the Corporation for Scienter
Purposes If the Executive Made a Public Misstatement• Eleventh Circuit: Section 2462’s Five-Year Limitations Period Applies to SEC Claims for Disgorgement
and Declaratory Relief, But Not to SEC Claims for Injunctive Relief• Southern District of New York: Companies Have No Obligation to Disclose Non-Binding Guidance from
Government Agencies• New York Court of Appeals: New York’s Common Interest Doctrine Only Protects Attorney-Client
Communications Disclosed to a Third Party in Connection with a Common Legal Interest in Pending or
Anticipated Litigation
June 2016

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Simpson Thacher & Bartlett LLPFirst Circuit: Promises of
Steak Dinners and Golf
Outings Are Sufficient toAllege the Personal Benefit
Requirement for Insider
Trading Liability in Tipping
Cases Brought Under theMisappropriation Theory
In Dirks v. S.E.C., 463 U.S. 646 (1983),
the Supreme Court held an insider can
only face liability under Section 10(b) andRule 10b-5 for disclosing material inside
information to a third party—or tipping—if
the insider “receive[d] a direct or indirect
personal benefit from the disclosure, suchas a pecuniary gain or a reputational benefit
that will translate into future earnings.” The

Dirks Court found that if a tipper receives
no personal benefit for disclosing theinformation to a third party (the tippee), then
the tippee has no duty to abstain from tradingon that information.
On May 26, 2016, the First Circuit considered
whether the personal benefit requirement
applies in criminal tipping cases brought
under the misappropriation theory of insider
trading liability recognized in United States
v. O’Hagan, 521 U.S. 642 (1997), rather thanthe classical theory of insider trading at issue
in Dirks.1 United States v. Parigian, 2016
1. In Dirks, the Court considered a case in which a corporate
insider tipped material inside information to a third party. In
O’Hagan, on the other hand, the Court addressed a case inwhich a law firm entrusted with its client’s material nonpublic
information misappropriated that information for trading
purposes. In the case before the First Circuit in Parigian, thealleged misappropriator did not himself trade on the basis of
inside information, but instead tipped that information to a third
party who then traded on the information.

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WL 3027702 (1st Cir. 2016) (Kayatta, J.).
The First Circuit held that to the extent thepersonal benefit requirement applies in cases
involving the tipping of misappropriatedinside information, the promise of “various
tangible luxury items,” such as steak dinners
and golf items, is sufficient to meet that
requirement.
The First Circuit’s decision deepened a circuit
split on the scope of the personal benefit
requirement, an issue the Supreme Court willaddress in the next term in the case of Salman
v. U.S. (No. 15-628). The Supreme Court willconsider whether the government must prove“an exchange that is objective, consequential,
and represents at least a potential gain [to thetipper] of a pecuniary or similarly valuable
nature,” as the Second Circuit held in UnitedStates v. Newman, 773 F.3d 438 (2d Cir.
2014)2; or whether the government may
establish the existence of a personal benefit
by presenting “evidence of a friendship orfamilial relationship between tipper andtippee,” as the Ninth Circuit found sufficientin United States v. Salman, 792 F.3d 1087
(9th Cir. 2015).3

BackgroundThe case before the First Circuit involved
an alleged insider trading scheme in which
an executive at American Superconductor
Corporation (“AMSC”) disclosed “highly
material inside information” concerning
AMSC’s “yet-to-be-announced earnings
reports and major commercial transactions”
to Eric McPhail, a close friend. Although
McPhail and the insider allegedly had “anunderstanding that information conveyed
between them was to remain confidential,”
McPhail allegedly began sharing AMSCrelated information with a circle of his regulargolfing companions, including Douglas
Parigian. McPhail did not himself trade in
AMSC stock. Rather, he allegedly “solicited‘getting paid back’ by Parigian and [hisother golfing companions] with wine, steak,and visits to a massage parlor.” Parigian
allegedly promised McPhail “a nice dinner”
at a steakhouse to thank him for the tips,
which allegedly netted Parigian more than$200,000 in trading profits.
2. Please click here to read our prior discussion of the Second
Circuit’s decision in Newman.
3. Please click here to read our prior discussion of the Ninth
Circuit’s decision in Salman.

The government indicted Parigian for insider
trading under the misappropriation theoryof liability. The government contended
that “Parigian knew or should have known
that, by providing the inside information to
Parigian, [McPhail] both breached a duty oftrust and confidence [to the AMSC insider]and personally benefited by doing so.”Parigian unsuccessfully moved to dismiss
the indictment, then “entered into a plea
agreement that preserved his right to appeal
the denial of the motion.” On appeal, Parigian
contended that the indictment failed to allege
several elements of criminal securities fraud,
including a personal benefit to McPhail fortipping the information to Parigian.

First Circuit Finds the Alleged
Promise of a Steak DinnerSufficient to Allege a Personal
Benefit in a Misappropriation Case
The First Circuit considered whether apersonal benefit to the tipper is an element of
an insider trading action brought under themisappropriation theory. The court noted thatit has previously addressed this issue twice inthe context of SEC civil enforcement actions.
The First Circuit explained that in SEC v.
Sargent, 229 F.3d 68 (1st Cir. 2000), it
found that “if a benefit need be proven”
in a misappropriation-based tippingcase, then the requirement was satisfied
by “the government’s evidence that themisappropriator and the tipper were businessand social friends with reciprocal interests.”
Several years later, in SEC v. Rocklage, 470
F.3d 1 (1st Cir. 2006), the court similarly heldthat if a personal benefit requirement applies
in misappropriation-based tipping cases,
then “‘the mere giving of a gift to a relative or
friend is a sufficient personal benefit’ to thegiver.” Parigian, 2016 WL 3027702 (quoting
Rocklage, 470 F.3d 1).
While the First Circuit recognized that
Sargent and Rocklage were both civil cases,
the court found the question of whether a“benefit to the misappropriating tipper [is] anelement of a Rule 10b-5 violation . . . would
seem to call for the same answer in both acivil and criminal proceeding.” The First
Circuit held that if a personal benefit to themisappropriator is in fact required under its
precedent, then “the indictment’s allegationsof a friendship between McPhail and Parigianplus an expectation that the tippees would
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treat McPhail to a golf outing and assorted
luxury entertainment [were] enough to allege[such] a benefit.”
The First Circuit noted that in Newman,
the Second Circuit “adopted a more
discriminating definition of the [necessary]
benefit to a tipper in a classical insider trading
case,” while in Salman, “the Ninth Circuit
seemed to align itself more closely with [theFirst Circuit’s] holding in Rocklage.” The First
Circuit stated that it did not know “[h]ow thiswill all play out” when the Supreme Court
considers the personal benefit question next
term. However, the First Circuit concluded
that it was “bound to follow [its] circuit’s
currently controlling precedent,” under which
the promise of “various tangible luxury items
in return for the tips” is sufficient to meet thepersonal benefit requirement.

First Circuit Finds the Indictment
Sufficiently Alleged McPhail’s
Breach of a “Duty of Trust andConfidence” Owed to the AMSC
Insider
The First Circuit also considered whether
the government sufficiently alleged that
“McPhail’s tips to Parigian breached aduty of trust and confidence owed to” the
AMSC insider within the meaning of theSupreme Court’s decision in O’Hagan. The
court observed that in O’Hagan, “that duty
and its breach were obvious” because themisappropriator was the company’s law firmand “it is clear that a company’s legal counsel

regularly receives information in trust andconfidence.”
Here, however, there was no allegation of
any “formal type of fiduciary or confidential
relationship” between McPhail and the
AMC insider. The First Circuit explainedthat the indictment only “describe[d] arelationship in which one friend share[d]obviously confidential information concerning
his business with another friend.” To
determine whether such a friendship could
give rise to “the type of breach of trustnecessary to support conviction under themisappropriation theory,” the court turnedto the text of the O’Hagan decision. The
Supreme Court enumerated examples of “thekinds of relationships that might give rise
to such a duty,” including “‘a relationship oftrust and confidence.’” Id. (quoting O’Hagan,
521 U.S. 642).
The First Circuit also considered the SEC
regulation clarifying the types of relationshipsthat give rise to a “duty of confidence” under
O’Hagan. Pursuant to the SEC’s rule, “a ‘dutyof trust and confidence’ exists . . . whenever[the parties] . . . have a history, pattern orpractice of sharing confidences, such thatthe recipient of the information knows orreasonably should know that the person
communicating the material nonpublic
information expects that the recipient will
maintain its confidentiality.” Id. (quoting 17
C.F.R.§ 240.10b5-2).4
4. The First Circuit recognized that there is a question as towhether this SEC rule “could serve as fully applicable in acriminal proceeding.”

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The First Circuit found “the indictment
expressly allege[d] that [the AMSC insider]and McPhail actually had an understanding,
based on their ‘history, pattern and practice,’that the information [the AMSC insider]shared with McPhail ‘was to remain
confidential.’” The court concluded thegovernment’s allegations were “enoughto plausibly describe the existence of therequisite duty and its breach.”First Circuit Finds Mens Rea
Requirement of Scienter Applies
in Criminal Tipping Cases
Parigian contended that the indictment was
defective insofar as it alleged that he “knewor should have known” certain key facts.
According to Parigian, the appropriate mens
rea standard in criminal insider trading cases
is scienter.
The First Circuit found Parigian had bothforfeited and waived this argument, but
determined that he otherwise “would have
had a point.” The court explained that “[t]hestate of mind required to establish liability
for fraudulently trading securities depends,
in relevant part, on whether the government
seeks to establish civil or criminal liability.”
The court noted that “[i]n a civil case, thegovernment need only show that ‘the tippee
knows or should know that there has been abreach [of the tipper’s fiduciary duty].’” Id.
(quoting Dirks, 463 U.S. 646). But “[i]n acriminal case such as this one, . . . the ‘knew
or should have known’ formulation runs up
against a decades-long presumption that the
government must prove that the defendant
knew the facts that made his conduct illegal.”
The First Circuit noted that both the Sixth andSeventh Circuits have “appl[ied] the Dirks[mens rea] formulation in criminal securities
fraud cases.” However, the First Circuit found“[t]he better view is that there is simply noreason why the mens rea requirement ofscienter that routinely and presumptively
applies in criminal cases would not apply inthis criminal case where Congress has givenno indication that it should not.”Second and Eleventh Circuits:
Constitutional Challenges toPending SEC ALJ Proceedings
Are Premature
On June 1, 2016, the Second Circuit rejected
as premature claims brought by respondents
in a pending SEC enforcement proceeding
alleging that the SEC’s appointment of theadministrative law judge (“ALJ”) in thematter violated the Appointments Clause of
Article II of the United States Constitution.
Tilton v. SEC, 2016 WL 3084795 (2dCir. 2016) (Sack, J.). Consistent with theprovisions of the SEC’s administrative review
scheme, the Second Circuit determined that“the appellants must await a final [SEC] order
before raising their Appointments Clauseclaim in federal court.”
In so holding, the Second Circuit agreed withsimilar decisions issued last year by the D.C.
Circuit and the Seventh Circuit. See Jarkesy
v. SEC, 803 F.3d 9 (D.C. Cir. 2015);5 Bebo v.
SEC, 799 F.3d 765 (7th Cir. 2015).6
On June 17, 2016, the Eleventh Circuit reliedin part on the Second Circuit’s decisionin Tilton to reverse a district court rulingexercising jurisdiction over constitutional
challenges to pending SEC administrative
enforcement proceedings. Hill v. SEC, 2016
WL 3361478 (11th Cir. 2016) (Pryor, J.).

BackgroundPursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, theSEC generally has a choice of fora whenbringing enforcement proceedings. The
SEC may either file an action in federal
district court, or conduct an administrative
enforcement proceeding before the SEC oran ALJ. The SEC’s administrative scheme
provides for “two layers of review: A party
that loses before the ALJ may petition for denovo review by the [SEC], and a party thatloses before the [SEC] may petition for review
by a federal court of appeals.” Tilton, 2016
WL 3084795.
In the case before the Second Circuit,respondents in pending SEC administrative
5. Please click here to read our prior discussion of the D.C.
Circuit’s decision in Jarkesy.
6. Please click here to read our prior discussion of the Seventh
Circuit’s decision in Bebo.

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enforcement proceedings brought suitin the Southern District of New York
contending that the SEC proceeding was“unconstitutional because the presiding
ALJ’s appointment violated Article II’s
Appointments Clause.” The district court
dismissed the action for lack of subject matter
jurisdiction. The court held “appellants’Appointments Clause challenge fell within the
exclusive scope of the SEC’s administrative
review scheme and could reach a federal court
only on petition for review of a final decisionby the [SEC].” The instant appeal followed.

Applying the Thunder Basin
Factors, Second Circuit Holds
Congress Intended Appellants’Appointments Clause Claim to
Be Reviewed Within the SEC’s
Administrative Scheme
Appellants contended that their
Appointments Clause claim was beyond “theexclusive purview of the SEC’s administrative
review scheme” under the Supreme Court’s
decision in Thunder Basin Coal Co. v.
Reich, 510 U.S. 200 (1994). The Thunder
Basin Court stated that in evaluating
whether plaintiffs’ “claims are of the type
Congress intended to be reviewed within [theapplicable] statutory structure,” courts mustassess whether: (1) “a finding of preclusion
could foreclose all meaningful judicial
review,” (2) the claims are “wholly collateral
to a statute’s review provisions,” and (3) the
claims are “outside the agency’s expertise.”
As discussed in further detail below, theSecond Circuit held that the Thunder Basinfactors “do not persuasively demonstrate that
the Appointments Clause claim falls outside
the scope of the SEC’s overarching scheme.”
Tilton, 2016 WL 3084795.
SEC’s Administrative Scheme Provides
for Meaningful Judicial Review ofAppellants’ Appointment Clause Claim
While appellants recognized that the SEC’s
administrative scheme “offers some judicial
review,” they contended that “their exposure
to the ongoing [SEC] proceeding—as distinct
from any adverse ruling that might result—would itself constitute a grave constitutional
injury that could not be redressed after
the fact.”

The Second Circuit explained that “litigants
who unsuccessfully challenge the authorityof a presiding judge or jury to decide a casemust often wait to appeal the issue until after
the court renders a final judgment.” The
Second Circuit reasoned that “[t]he litigant’s
financial and emotional costs in litigating
the initial proceeding are simply the price ofparticipating in the American legal system.”Appellants’ Appointment Clause ClaimIs Not “Wholly Collateral” to the SEC’s
Administrative Review Scheme
The district court held appellants’Appointments Clause claim “did not
qualify as ‘wholly collateral’” to the SEC’s
administrative review scheme “because it
was procedurally intertwined with the SEC’s
ongoing proceeding, where it functioned as anaffirmative defense.”
The Second Circuit stated that it was “inclined
to agree with the district court’s assessment”
pending “further guidance from the Supreme
Court.” The court reasoned that appellants’Appointments Clause claim was analogous totheir defenses to the underlying Investment
Advisers Act charges at issue because it was “a‘vehicle by which’ the appellants [sought] toprevail in the proceeding.” Id. (quoting Elginv. Dep’t of Treasury, 132 S. Ct. 2126 (2012)).
Appellants’ Appointment Clause
Claim Falls Within the Scope of the
SEC’s Expertise
The Second Circuit found that it was “aclose question” as to whether “appellants’5Appointments Clause claim [fell] outside the
SEC’s expertise.”
However, the Second Circuit observed thatin Elgin, 132 S. Ct. 2126, the Supreme Court“emphasize[d] that an agency may bring its
expertise to bear on a constitutional claim
indirectly, by resolving accompanying,potentially dispositive issues in the sameproceeding.”“Applying Elgin’s approach” to the case before
it, the Second Circuit found the SEC mightrule in favor of appellants on the Investment
Adviser Act claims at issue, “in which case theconstitutional question would become moot.”
Appellants Must Await a Final
SEC Order Before Raising Their
Appointments Clause Claim inFederal Court
Concurring with “the decisions of the Seventhand D.C. Circuits in Bebo and Jarkesy,” theSecond Circuit concluded that “appellants
must await a final [SEC] order before
raising their Appointments Clause claim infederal court.”

Sixth Circuit: A Corporate
Executive’s State of Mind
May Only Be Imputed to
the Corporation for Scienter
Purposes If the Executive
Made a Public Misstatement
On May 24, 2016, the Sixth Circuit affirmed
dismissal of a securities fraud action against
General Cable Corporation for failure toallege scienter. Doshi v. General Cable, 2016
WL 2991006 (6th Cir. 2016) (Cook, J.). The
Sixth Circuit found that a senior corporate
executive’s alleged knowledge of certain theft
and accounting errors could be imputed tothe corporation. However, the Sixth Circuit
held the executive’s state of mind could not
be imputed to the corporation for scienter
purposes because the defendant did not makeany public misstatements.

Background
Plaintiffs brought suit in the Eastern
District of Kentucky alleging that General
Cable Corporation and two of its executives
had “acted at least recklessly in issuing
or approving General Cable’s . . . publicfinancial statements,” which were allegedly“materially false” because of accounting
errors and an alleged theft scheme in thecompany’s Brazilian operations. The district
court dismissed plaintiffs’ claims for failure toallege scienter. Plaintiffs appealed.

6Sixth Circuit Declines to Impute to
the Corporation the State of Mindof a Senior Executive Who Made No
Public Misstatements

Applying the Helwig Factors,
Sixth Circuit Finds Plaintiffs’
Allegations Insufficient to Plead
Corporate Scienter

Plaintiffs alleged that Mathias Sandoval,
the General Cable executive responsible
for the company’s Brazilian operations,submitted allegedly misleading financial data
to General Cable, which the company thenincorporated into its financial disclosures.
Plaintiffs contended that Sandoval’s state ofmind could be imputed to General Cable forscienter purposes.

The Sixth Circuit applied the Helwig factors
and considered the allegations of thecomplaint holistically to determine whether
plaintiffs adequately pled General Cable’s
scienter. The court found “[t]wo Helwig
factors support[ed] inferring scienter:(1) divergence between internal reports andexternal statements on financial data; and(2) disregard for the most current factual
information before making public financial
statements.”

The Sixth Circuit found plaintiffs “sufficiently
allege[d]” that Sandoval “knew of theft andinventory accounting errors in Brazil in
January but failed to report those problems
to General Cable until September 2012.”
However, the court held that even if Sandoval
had “acted recklessly in transmitting [hisdivision’s] financial data to General Cable,
only his knowledge of theft and accounting
errors―not his state of mind―impute[d]to General Cable.” The court reasoned that
under its prior decision in In re Omnicare
Securities Litigation, 769 F.3d 455 (6thCir. 2014), “a corporate executive’s or
employee’s state of mind” may only be
imputed “to a corporate defendant whensuch a person makes a public misstatement.”
But here, plaintiffs did not allege any “public
misstatement by Sandoval from which to
impute his recklessness directly to General
Cable.” Rather, plaintiffs alleged only that
“Sandoval submitted [his division’s] financial
data to General Cable, not that he drafted,
reviewed, or approved General Cable’s
erroneous public financial statements.”
Based on these allegations, the Sixth Circuit
imputed to General Cable “Sandoval’s
knowledge of theft and accounting errors
in Brazil,” but not his scienter. The court
explained that under Sixth Circuit precedent,
it was then required to apply the factors
set forth in Helwig v. Vencor, 251 F.3d 540(6th Cir. 2001)7 “to analyze whether all thefacts alleged [gave] rise to a strong inference
that General Cable [had] acted with thenecessary scienter.”

However, the Sixth Circuit determinedthat “[t]he disparity between Sandoval’s
knowledge and what General Cable publicly
misstated . . . reduce[d] the force behind thesefactors.” The court explained that “Sandoval
knew about theft and inventory accounting
errors in [his division’s] Brazilian operations”
but “General Cable misstated its firm-wide
financial data of which [Sandoval’s] data
composed only a part.”
In light of “Sandoval’s knowledge and themagnitude of [General Cable’s] financial
misstatements,” the Sixth Circuit foundit possible to “infer that General Cable[had] acted recklessly by issuing its publicfinancial statements from January 2012 to
September 2012.” But the court stated that “acountervailing inference remain[ed] stronger:a theft scheme racked General Cable’s
operations in Brazil where local managers
overrode accounting procedures, which, whencoupled with the legitimate freedom afforded[Sandoval’s division] to report its financial
data, led General cable to issue materiallyfalse public financial statements.” The Sixth
Circuit held plaintiffs’ “allegations therefore
fail[ed] to create a strong inference that
General Cable acted with scienter.”

7. In Helwig, the Sixth Circuit enumerated a non-exhaustive
list of nine factors courts must consider when evaluating acomplaint’s scienter allegations.
7Eleventh Circuit: Section
2462’s Five-Year Limitations
Period Applies to SEC
Claims for Disgorgement
and Declaratory Relief,
But Not to SEC Claims for
Injunctive Relief
Pursuant to 28 U.S.C. § 2462, theGovernment may not bring any “action, suit,or proceeding for the enforcement of any civil
fine, penalty, or forfeiture” more than five
years after the claim accrues.
On May 26, 2016, the Eleventh Circuit held
Section 2462’s limitations period applies to
SEC claims for disgorgement and declaratory
relief, but not to claims for injunctive relief.
SEC v. Graham, 2016 WL 3033605 (11th Cir.
2016) (Pryor, J.). The court determined that,for Section 2462 purposes, disgorgement isa type of “forfeiture” and declaratory relief“operate[s] as a penalty.” However, the court
found injunctions are “equitable, forwardlooking remedies” outside the reach of Section
2462.

BackgroundAt issue were claims that several individual
defendants had “violated federal securities
laws by selling condominiums that werefunctioning, in reality, as unregisteredsecurities.” The SEC brought suit against
defendants in the Southern District of Florida,seeking declaratory and injunctive relief,
as well as disgorgement and civil penalties.

Defendants moved to dismiss the SEC’s
claims under Section 2462 on the grounds
that the alleged violations occurred more than
five years before the SEC filed suit.
The district court held Section 2462 applied
to bar all of the SEC’s claims. The court found“the injunctive and declaratory relief the SEC
sought were penalties” within the meaningof Section 2462, while “the disgorgement the
SEC requested constituted forfeiture” underthat provision. Defendants appealed.

Eleventh Circuit Finds Section
2462 Applicable to Disgorgement
Claims Because Disgorgement Is a
“Forfeiture” Under Section 2462
The Eleventh Circuit agreed with the district
court’s conclusion that disgorgement “cantruly be regarded as nothing other than aforfeiture” within the meaning of Section
2462.
Because Section 2462 does not define theterm “forfeiture,” the Eleventh Circuit
considered the term’s ordinary meaning.
The court found “forfeiture occurs whena person is forced to turn over money orproperty because of a crime or wrongdoing.”
The Eleventh Circuit discerned “nomeaningful difference in the definitions ofdisgorgement and forfeiture,” and observedthat the Supreme Court “has used the terms
interchangeably.”
The court rejected the SEC’s attempt todistinguish disgorgement from forfeiture byarguing that “disgorgement only includes
direct proceeds from wrongdoing, whereas
forfeiture can include both ill-gotten gains
and any additional profit earned on those
ill-gotten gains (i.e., secondary profits).” The
Eleventh Circuit found that “even under” the
SEC’s proposed definitions, “disgorgement is
imposed as redress for wrongdoing and canbe considered a subset of forfeiture” subject toSection 2462’s limitations period.

Eleventh Circuit Holds Section 2462
Applies to Claims for Declaratory
Relief Because Such Relief Operates
as a “Penalty”
The Eleventh Circuit held Section 2462’s
limitations period also applies to claims fordeclaratory relief. The court reasoned thatdeclaratory relief “operate[s] as a penalty
8under § 2462” because it “is backwardlooking” and “intended to punish.” Thecourt explained that declaratory relief“serves neither a remedial nor a preventative
purpose” but is instead “designed to redress
previous infractions.” The Eleventh Circuit
stated that “[a] public declaration that thedefendants violated the law does little otherthan label the defendants as wrongdoers.”

Eleventh Circuit Holds Injunctive
Relief Is Not a “Penalty” forPurposes of Section 2462
As to the SEC’s claims for injunctive relief, theEleventh Circuit concluded that its “precedent
forecloses the argument that § 2462 applies
to injunctions, which are equitable remedies.”
The court explained that in United States
v. Banks, 115 F.3d 916 (11th Cir. 1997), it
held Section 2462 inapplicable to a claim
for injunctive relief brought to enforce the
Clean Water Act. The Banks court found thegovernment’s injunction was “an equitable
remedy and thus beyond the reach” of Section
2462. Following its holding in Banks, theEleventh Circuit determined that “[a]ninjunction requiring (or forbidding) future
conduct is not subject to § 2462’s statuteof limitations.”
The Eleventh Circuit stated that “[e]ven
if [it] were not bound by Banks,” it would
still “conclude that § 2462 does not apply
to injunctions like the one in this case”
because injunctions are not “penalties” forSection 2462 purposes. Since the statutedoes not define the term “penalty,” the court
considered “the term’s ordinary meaning.”
The court found that each of the variously
formulated definitions of “penalty” “has thecommon element of looking backward intime.” While “a penalty addresses a wrong
done in the past,” the Eleventh Circuit
observed that injunctions “typically lookforward in time.” The court concluded thatan injunction “is not a penalty within themeaning of § 2462,” and held “the five-year
statute of limitations [ ] inapplicable to
injunctions such as the one the SEC sought inthis case.”

Southern District of New
York: Companies HaveNo Obligation to Disclose
Non-Binding Guidancefrom Government Agencies
On June 21, 2016, the Southern District of
New York dismissed in its entirety a securities
fraud action against Alibaba Group Holding
Limited. Christine Asia Co. v. Alibaba Group
Holding Ltd., 2016 WL _____ (S.D.N.Y.
2016) (McMahon, C.J.).8 The court held
Alibaba had no obligation to disclose in
its IPO Registration Statement either the
existence or the substance of “informal andnon-binding guidance” provided by a Chinese
government agency concerning the company’s
e-commerce practices.

Background
Alibaba is a Chinese e-commerce company
that operates a number of popular
e-commerce marketplaces in which“independent third party merchants sell
products to wholesale and retail buyers
around the world.” Alibaba, like many
third-party platform operators, has long
faced scrutiny regarding the alleged saleof counterfeit goods by third parties on its
marketplaces.
On July 16, 2014, representatives of China’s
State Administration for Industry andCommerce (“SAIC”) met with Alibaba toprovide the company with administrative
guidance concerning compliance with Chineselaw, including newly enacted regulations by
the SAIC (“the July 16 Meeting”). Among the
topics discussed was the sale of counterfeit
goods on Alibaba’s marketplaces. Under the
Chinese regulatory scheme, administrative
guidance is a “non-compulsory” and “informal
regulatory tool used by the SAIC to encouragebusinesses and industries to self-regulate.”
Earlier that year, the SAIC had announced thelaunch of the “Red Shield and Web Sword”
program (the “Red Shield Program”), an
initiative aimed at reducing counterfeit sales,
among other practices.
On September 19, 2014, Alibaba conducted
an initial public offering on the New York8. Simpson Thacher represents Alibaba and the individual
defendants in this matter.
9

Stock Exchange.9 The company’s Registration
Statement “contained a litany of disclosuresabout the pitfalls of e-commerce, the Chinese
regulatory environment, and the attendantrisks to Alibaba’s business.” The company“disclosed that it had been criticized in thepast due to the sale of pirated, counterfeit andillegal products on its sites” and explainedthat Chinese law “required it to police its
marketplaces for unlicensed merchants andcounterfeit goods.” The company cautionedthat it was subject to new more “stringent”
ecommerce laws, it “expect[ed] to face
increased scrutiny” from regulators, andthat as a result of its business risks, it could
be subject to a variety of adverse effects,
including increased compliance costs andcivil and criminal liabilities. However, thecompany did not “disclose the existence of
the Red Shield Program” or “reveal that it
had received administrative guidance fromthe SAIC.”On January 28, 2015, a self-described “white
paper” appeared on the SAIC’s website
purportedly describing the July 16 Meeting.
Although the white paper was removed fromthe SAIC’s website within hours, numerous
media outlets reported on the white paper.
On January 29, 2015, Alibaba acknowledged
in a press release and earnings call that the
July 16 Meeting had taken place. Alibaba’s
share price fell substantially on January 28
and January 29. Seven class actions followedin various district courts; these actions were
centralized in a multi-district litigation in theSouthern District of New York.
Plaintiffs alleged Alibaba and several of its
officers and directors had “knowingly or
recklessly concealed” the July 16 Meeting and
the SAIC’s administrative guidance in order to“artificially inflate” the company’s IPO price.
Defendants moved to dismiss for failure tostate a claim.

Court Holds Alibaba Had
No Duty to Disclose the SAIC’s
Administrative Guidance Under
Section 10(b) and Rule 10b-5
At the outset of its analysis, the court
observed that Alibaba’s Registration
Statement was “unusually comprehensive.”
The court found Alibaba’s disclosures “morethan sufficient to warn investors that Alibaba
faced continuing risks related to the sale ofcounterfeit goods in its marketplaces, andthat it could face enforcement actions andsubstantial fines should it fail to properly
police its marketplaces for defective
and illegal goods.” Moreover, the court
determined that Alibaba’s disclosures madeit “clear that China’s legal and regulatoryenvironment [rendered] investing in a
Chinese company, like Alibaba, risky.”
The court found the key issue was whether:“an offering document that fully discloses all
substantive investment risks [is] materiallymisleading if it fails to disclose that agovernment agency . . . met with the issuer
to underscore the issuer’s obligation toameliorate those risks?” The court concluded
that the answer is “no.” As a general matter,the court explained that “a company is notcompelled to disclose every communication
it has with a regulator—even where, as
here, a regulator has informed a company
of deficiencies in its operations.” The court
noted that in Acito v. IMCERA Group,
47 F.3d 47 (2d Cir. 1995), for example,
the Second Circuit held a health products
manufacturer had no duty to disclose
Food and Drug Administration (“FDA”)
inspections that uncovered deficiencies in
the company’s manufacturing operations.
The Second Circuit in that case held that nodisclosure was required because “the two
inspections had not resulted in any adverse
action that affected earnings—even thougha third inspection ultimately resulted in
the company shutting down the facility.”
Similarly, the Alibaba court noted that in In
re Sanofi Securities Litigation, 87 F. Supp.
3d 510 (S.D.N.Y. 2015), the court held apharmaceutical company had no duty todisclose FDA concerns regarding the testing
methodology for a new pharmaceuticalbecause it determined that such feedback“‘does not express a binding agency decision.’”Id. (quoting Sanofi, 87 F. Supp. 3d 510).
Turning to Alibaba’s disclosures, the court
held Alibaba’s failure to disclose the July
16 Meeting and its receipt of “informal andnon-binding guidance” from the SAIC did not“render inaccurate any statement about thelikelihood of an actual inquiry or investigation
taking place.” The court also found it
immaterial that “[t]he Registration Statement
did not specifically mention the ‘Red Shield’
Program’” because plaintiffs “allege[d] thatthe program was widely publicized” and “the9. Simpson Thacher represented Alibaba in the IPO.
10

did not represent that its efforts to comply
with the law were particularly effective, letalone foolproof.” The court concluded that
Alibaba’s “disclosures were not likely to causea reasonable investor to make an overly
optimistic assessment of that risk.”

Court Further Determines Alibaba
Had No Duty to Disclose the SAIC’s
Administrative Guidance Under
Items 303 or 503
With respect to plaintiffs’ contention that
defendants had a duty to disclose the SAIC’s
administrative guidance under Items 303 and503 of Regulation S-K,10 the court held“[n]either regulation compel[s] disclosure.”

securities laws do not require disclosure of
information that is publicly known.”
The court rejected plaintiffs’ contention
that Alibaba’s Registration Statement wasmaterially misleading insofar as the company
represented that no inquiry or investigation“has resulted in significant restrictions on [thecompany’s] business operations.” The court
reasoned that plaintiffs had “not alleged facts
tending to show that Alibaba actually face[d]a government inquiry or investigation thatwas likely to result in significant restrictions
on Alibaba’s business operations.” Rather,plaintiffs alleged only “that Alibaba attended
a meeting with Chinese regulators, at which
it received nonbinding administrative
guidance aimed at encouraging Alibaba” toself-regulate. The court underscored that“[m]aking Alibaba aware of concerns andprompting it to pay attention to problems it
had plainly disclosed is not tantamount to theinstitution of a formal regulatory proceeding.”
The court also determined that plaintiffs’
reliance on the Second Circuit’s decisionin Meyer v. Jinkosolar Holdings Co., 761
F.3d 245 (2d Cir. 2014), was misplaced. In
Jinksolar, the defendant allegedly “disclosedthat environmental violations generally poseda financial risk to the company, while not
cautioning investors that it knew its efforts
to comply with Chinese law were failingand could expose it to penalties.” Here,however, the court explained that “Alibaba

The court found meritless plaintiffs’ argumentthat under the Second Circuit’s decisionin Indiana Public Retirement System v.
SAIC, 818 F.3d 85 (2d Cir. 2016), “Item 303
requires disclosures of even potential harm to
a company’s business.” The court underscoredthat “the Second Circuit has never imposedsuch a sweeping disclosure obligation.”
In Indiana Public Retirement System, theSecond Circuit held “a government contractor[had] violated Item 303 by failing to disclosethat it had overbilled various New York City
agencies by millions of dollars and that the
overbilling practices subjected it to monetaryand reputational risks.” The Alibaba court
explained that “the likelihood of harm in
Indiana Public Retirement System was
not merely potential—it was probable and,indeed, imminent.” Here, however, thecourt determined there was “far less reason
to believe that the July 16 Meeting ‘mightreasonably be expected’ to have a material
effect on Alibaba’s business.”
The court similarly found Section 503 did
not “compel[ ] disclosure” of the July 16
meeting and the SAIC’s guidance. Whilethe court noted that there is “scant caselaw”
10. Pursuant to Item 303 of Regulation S-K, Registration
Statements must include a description of “any known trends
or uncertainties that have had or that the registrant reasonably
expects will have a material favorable or unfavorable impact on
net sales or revenues or income from continuing operations.”
Item 303 does not apply to foreign corporations, but the SEC
has stated that its interpretations of Item 303 apply to theManagement Discussion & Analysis disclosures required under
Item 5 of Form 20-F, which does apply to foreign corporations.
Item 503 of Regulation S-K mandates that Registration
Statements “provide under the caption ‘Risk Factors’ a discussionof the most significant factors that make the offering speculative
or risky.”11

on this provision, the court explained thatthe relevant inquiry for Item 503 purposesis “whether the Offering Documents were
accurate and sufficiently candid.” Thecourt found the Registration Statement
was “accurate and sufficiently candid”
with regard to the SAIC’s crackdown on
violations of [Chinese law] on e-commercesites like Alibaba.” As to plaintiffs’ claim that
“Alibaba was obligated to admit that it was
engaged in conduct that violated Chinese andAmerican laws and regulations,” the courtemphasized that there were no allegations
that Alibaba had “ever been charged withsuch misconduct.” The court held that “inlight of Second Circuit case law declining toimpose a duty to disclose uncharged conduct
under Item 503,” plaintiffs had “failed to statea duty to disclose” pursuant to Item 503. Id.
(citing In City of Pontiac Policemen’s andFiremen’s Ret. Sys. v. UBS AG, 752 F.3d 173(2d Cir. 2014)).

Court Finds Plaintiffs Failed toAllege Scienter
The court held plaintiffs’ Section 10(b) claims“fail[ed] for the additional reason that they[had] not pleaded facts giving rise to a strong
inference that either the [i]ndividual[d]efendants or the [c]ompany acted withthe requisite scienter.” With respect toplaintiffs’ scienter allegations as to Alibaba,
the court found it “well established that a
corporation’s desire to raise funds through an
IPO and to obtain favorable pricing for a bondoffering do not give rise to a strong inferenceof scienter.” As to the individual defendants,
the court acknowledged that their profits
from the IPO were “massive sums”; however,the court found plaintiffs’ failure to allege
facts showing that the individual defendants’“insider trading sales were unusual . . .
temper[ed] any strong inference of scienter
that [could] be raised based on [their] insider
sales alone.”The court dismissed plaintiffs’ claims intheir entirety and denied plaintiffs leave
to amend their complaint, concluding thatthe deficiencies in the allegations were“substantive,” rather than inartful pleading.
The court reasoned that the “linchpin” of thecase was the July 16 Meeting, which could
not “be construed as anything more than an
informal meeting with regulators.”

New York Court of Appeals:
New York’s Common
Interest Doctrine Only
Protects Attorney-Client
Communications Disclosed toa Third Party in Connection
with a Common Legal Interest
in Pending or Anticipated
Litigation
Pursuant to the common interest doctrine,“an attorney-client communication that is
disclosed to a third party remains privileged if
the third party shares a common legal interest
with the client who made the communicationand the communication is made infurtherance of that common legal interest.”
Ambac Assurance Corp. v. Countrywide
Home Loans, 2016 WL 3188989 (N.Y. 2016)(Pigott, J.) (Countrywide III).
On June 9, 2016, the New York Court ofAppeals held that New York’s common
interest doctrine only applies if the attorneyclient communications were shared witha third party “in furtherance of a common
legal interest in pending or reasonably
anticipated litigation.” Id. (emphasis added).
Significantly, the court found New York’scommon interest doctrine inapplicable toattorney-client communications shared byentities with “a common legal interest in acommercial transaction or other common
problem” where those entities “do notreasonably anticipate litigation.”

Background
Ambac Assurance Corporation guaranteed
payments on certain residential mortgagebacked securities (“RMBS”) issued bya subsidiary of Countrywide Financial
Corporation. “When the mortgage-backed
securities that Ambac insured failed during
the recent financial crisis,” Ambac broughtsuit against Countrywide asserting breach ofcontract and fraudulent misrepresentation
claims, among other claims. Ambac named
Bank of America as a defendant in the suitbased on its merger with Countrywide,pursuant to which “Countrywide sold
substantially all of its assets to Bank ofAmerica.” Ambac claimed “Bank of America
became Countrywide’s successor-in-interest
and alter ego and was responsible for12Countrywide’s liabilities to Ambac in theunderlying action for fraud.”
During the course of discovery, Bank ofAmerica contended that the common interest
doctrine protected several hundred attorneyclient communications shared with it byCountrywide “because they pertained to anumber of legal issues the two companies
needed to resolve jointly in anticipation of
the merger closing.” Ambac moved to compel
these communications on the grounds that
Bank of America and Countrywide “were notaffiliated entities at the time of disclosureand did not share a common legal interest in
litigation or anticipated litigation.”
The trial court held the common interest
doctrine inapplicable based on its
determination that “New York law ‘requiresthat there be a reasonable anticipationof litigation’ in order for the common
interest doctrine to apply.” Id. (quoting
Ambac Assurance Corp. v. Countrywide
Home Loans, 41 Misc. 3d 1213(A) (N.Y.
Sup. Ct. 2013)). On appeal, the First
Department “concluded that pending or
reasonably anticipated litigation was nolonger a necessary element of the [common
interest] exception.” Id. (discussing Ambac
Assurance Corp. v. Countrywide Home
Loans, 124 A.D.3d 129 (App. Div. 2014)(Countrywide II)). In so holding, the First
Department observed that federal courts
have “‘overwhelmingly rejected [a litigation]requirement’” for the common interest
doctrine. Id. (quoting Countrywide II, 124
A.D.3d 129). Ambac appealed.

New York Court of Appeals Holds
the Common Interest Doctrine
Does Not Extend to AttorneyClient Communications Disclosed
Outside the Context of Pending or
Threatened Litigation
The Court of Appeals observed that “until theFirst Department’s decision in this case, NewYork courts [have] uniformly rejected efforts
to expand the common interest doctrine
to communications that do not concern
pending or reasonably anticipated litigation.”
Reversing the First Department’s decision,
the Court of Appeals declined to “expand[ ]the common interest doctrine to protect
shared communications in furtherance of any
common legal interest” other than “pendingor reasonably anticipated litigation.”
The Court of Appeals reasoned that thisformulation ensures that the common interest
doctrine remains “limited to situations
where the benefit and the necessity of sharedcommunications are at their highest, and thepotential for misuse is minimal.” The court
explained that “[w]hen two or more parties
are engaged in or reasonably anticipate
litigation in which they share a common legal
interest, the threat of mandatory disclosure
may chill the parties’ exchange of privileged
information and therefore thwart any desire
to coordinate legal strategy.” The court foundthat in these types of situations, “the common
interest promotes candor that may otherwise
have been inhibited.”
The Court of Appeals found this samerationale does not extend to “clients13

who share a common legal interest in acommercial transaction or other commercial
problem but do not reasonably anticipate
litigation.” The court observed that there
was “no evidence . . . that mergers, licensing
agreements and other complex commercial
transactions have not occurred in New
York because of [the] [s]tate’s litigation
limitation on the common interest doctrine.”
The court reasoned that “when businesses
share a common interest in closing acomplex transaction, their shared interestin the transaction’s completion is alreadyan adequate incentive for exchanging
information necessary to achieve that end.”
Moreover, the Court of Appeals determinedthat broadening the common interest doctrine“to communications made in the absenceof pending or anticipated litigation” could
result in a “substantial loss of evidence,” andwould entail “potential for abuse.” The court
observed that the common interest doctrine
could be asserted with respect to “a wide
range of communications between parties
who assert common legal interests but who
really have only non-legal or exclusively
business interests to protect.”
The court “conclude[d] that the policy
reasons for keeping a litigation limitationon the common interest doctrine outweighany purported justification for doing awaywith it.”Judge Rivera, Dissenting, States theCommon Interest Doctrine Should
Extend to the Transactional Context
In a lengthy dissent, Judge Rivera expressed
her view that the common interest doctrine“should apply to private client-attorneycommunications exchanged during the courseof a transformative business enterprise, inwhich the parties commit to collaboration andexchange of client information to obtain legal
advice aimed at compliance with transactionrelated statutory and regulatory mandates.”
Judge Rivera stated that applying thecommon interest doctrine in the transactional
context “encourages parties committed to amerger to disclose confidential information
to avoid submission of incomplete or
noncompliant documents.”
Justice Rivera opined that there was no“distinction between coparties or persons who
reasonably anticipate litigation, and parties
committed to the completion of a merger”
because “[b]oth are incentivized to cooperate
in order to secure a mutually beneficial
outcome—one a successful litigation outcome,the other a successful commercial outcome.”
She stated that “[n]o rational basis exists torecognize the expectations for maintaining
confidences in the former but not the latter.”

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).

14

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Mark G. Cunha+1-212-455-3475
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Lynn K. Neuner+1-212-455-2696
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Paul C. Curnin+1-212-455-2519
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Thomas C. Rice
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