Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Determine Whether Purchasing Shares in a Direct Listing Creates
Standing Under the Securities Act• Western District of New York: Denies Dismissal of Class Action Claiming That a Company and Two
Executives Hid an SEC Investigation• Court of Chancery of Delaware: Denying Dismissal, Court Could Not Conclude That De-SPAC Merger
Was the Product of Fair Dealing• District of Columbia: SEC Seeks Names of Law Firm Clients Impacted by a 2020 Cyberattack
January 2023

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Supreme Court: Grants
Certiorari to Determine
Whether Purchasing
Shares in a Direct Listing
Creates Standing Under the
Securities Act
On December 13, 2022, the Supreme Court
granted certiorari to consider whether
Sections 11 and 12(a) of the Securities Act
require a plaintiff who purchased sharesthrough a direct listing to plead and provethat he bought shares registered under aspecific allegedly misleading registration
statement. Slack Techs. v. Pirani, No. 22-200.
Petitioners (defendants below) are appealinga 2021 Ninth Circuit decision interpreting the“such security” language in Section 111 and1. Section 11 of the Securities Act provides, in relevant part:“In case any part of the registration statement . . . contained
an untrue statement of a material fact or omitted to state amaterial fact required to be stated therein or necessary to
make the statements therein not misleading, any person
acquiring such security . . . may, either at law or in equity,
in any court of competent jurisdiction, sue . . . .” 15 U.S.C.
§ 77k(a).

Simpson Thacher & Bartlett LLP

Section 12(a)2 to mean any share, registeredor unregistered, and holding that plaintiff
need not prove that he bought registeredshares. Pirani v. Slack Techs., 13 F.4th 940(9th Cir. 2021).3
Petitioners claimed that the Ninth Circuit’s
reading threatens to dramatically expand
liability under the Securities Act, will leadto forum shopping, and departs from wellestablished law. Petitioners noted that in
the past, “seven other courts of appeals had
uniformly held that ‘such security’ meansa share registered under the registration
statement challenged by the plaintiff asmisleading.” They argued against the Ninth
2. Section 12(a) provides, in relevant part: “Any person
who . . . offers or sells a security . . . by means of a prospectus
or oral communication, which includes an untrue statementof a material fact or omits to state a material fact necessary inorder to make the statements, in the light of the circumstances
under which they were made, not misleading . . . and who
shall not sustain the burden of proof that he did not know, andin the exercise of reasonable care could not have known, ofsuch untruth or omission, shall be liable, subject to subsection(b), to the person purchasing such security from him, who
may sue . . . to recover the consideration paid for suchsecurity . . . .” 15 U.S.C. § 77l(a).
3. Please click here to read our discussion of the Ninth Circuit’s
decision in Pirani.

Circuit’s reliance on policy concerns to
expand the meaning of “such security” toinclude unregistered shares and claimed thatdeparting “from the settled understandingof Section 11 is irreconcilable with numerous
other court of appeals decisions.”

this case respondent noted there was only
one registration statement and, therefore,
no chance that purchasers bought sharesbased on a registration statement that did
not contain the alleged misrepresentations oromissions.

Petitioners further warned that the Ninth
Circuit’s rule would apply not only to
direct listings, but also to traditional IPOs.
Petitioners explained that six months aftera typical IPO the lockup expires, allowing
unregistered shares to be sold on an
exchange. Petitioners point out that under theapproach adopted by other courts of appeal,
the expiration of the lockup generally cuts
off Section 11 liability.4 However, petitioners
claimed that under the Ninth Circuit’s rule,
any shareholder would have standing tosue under Section 11 until the statute oflimitations expires.

Respondent also argued that the Ninth Circuit
properly considered the policy and legislative
history underlying the statute because Section
11’s reference to “such security” is unclear on
its face. Further, claiming that petitioners
overstate the consequences and reach of theNinth Circuit’s decision, respondent argued
that the holding is limited to direct listingsand only those instances where registeredand unregistered shares are simultaneously
sold to the public under a single registration
statement. Respondent claimed that theNinth Circuit observed the difference between
a traditional IPO with its lockup period anda direct listing where all of the shares are
released at the same time.

By contrast, respondent claimed that theNinth Circuit’s decision does not conflict withother circuit courts’ decisions. Although othercircuits have found that “to have standing
under Section 11 purchasers must ‘trace’
their securities to a particular registration
statement,” they have done so in the context
where there were multiple registration
statements. Brief for Respondent, SlackTechs. v. Pirani (No. 22-200). Respondent
argued that the “judge-made tracing
requirement made sense in those instances”
because to have standing, in the case of morethan one registration statement, purchasers
needed to trace their securities back to theregistration statement with the alleged
misstatement or omission. By contrast in
4. As petitioners stated in their petition for a writ of certiorari,
the expiration of the lockup, which causes a mix ofunregistered and registered shares to be available for tradingon an exchange, “cuts off Section 11 liability by precluding
post-lockup buyers from proving that they bought registeredshares.”The Supreme Court will hear and rule on
Slack Techs. v. Pirani later this term; a datefor oral argument has not yet been set.

Western District of New
York: Denies Dismissal ofClass Action Claiming That a
Company and Two Executives
Hid an SEC Investigation
On January 6, 2023, the Western Districtof New York denied dismissal of a putative
securities fraud class action against abiotechnology company and two of its
executives alleging that they made materiallyfalse or misleading statements in violationof Rule 10b-5(b) in various SEC filings,

2which disclosed issues with the company’s
accounting practices but failed to mention
an ongoing SEC investigation into purported
material weaknesses in the company’s
internal accounting practices. Noto v. 22nd
Century Grp., 2023 WL 122305 (W.D.N.Y.
2023) (Sinatra, J.). The court held that basedon defendants’ motive and opportunity to
defraud, plaintiffs sufficiently plead scienter
against defendants with respect to some of theallegedly false or misleading SEC filings but
not others.

Procedural History
After the district court initially dismissed
the class action complaint, the Second
Circuit vacated the lower court’s dismissalof plaintiffs’ material misrepresentation
claims under 10b-5(b), “holding that
Defendants had a duty to disclose the SEC
investigation because they addressed theiraccounting weaknesses in their 10-Ks and
10-Qs and, therefore, disclosing the SEC
Investigation was necessary to tell the wholetruth.” Noto v. 22nd Century Grp., 35 F.4th
95 (2d Cir. 2022).5 The Second Circuit
concluded that “the complaint adequately
alleged that defendants violated Rule 10b5(b) both by first omitting mention of the
SEC investigation and then by affirmatively
denying its existence.” After remand,
defendants sought dismissal, in part, for
failure to allege scienter.

Alleged Misrepresentations Could
Have Been Motivated By a Desire
to Bolster Capital Gained FromSpecific Stock Offerings
The court held that plaintiffs alleged sufficient
facts to meet the scienter requirement for
their 10b-5(b) claims. Citing Tellabs v. Makor
Issues & Rights, 551 U.S. 308 (2007), thecourt stated that the issue is “whether all of
the facts alleged, taken collectively, give rise toa strong inference of scienter . . . .” The court
explained that “[t]o meet this standard, aplaintiff may allege facts (1) showing that thedefendants had both motive and opportunity
to commit the fraud or (2) constituting
strong circumstantial evidence of conscious
misbehavior or recklessness.” ASTI Commc’ns
v. Shaar Fund, 493 F.3d 87 (2d Cir. 2007).
5. Please click here to read our discussion of the Second Circuit’s
decision in Noto.

More specifically, “[a]s to motive, a plaintiff
must allege concrete benefits that could
be realized by one or more of the false
statements and wrongful nondisclosure
alleged.” Shields v. Citytrust Bancorp,
25 F.3d 1124 (2d Cir. 1994). And as toopportunity under Shields, “a plaintiff must
allege the means and likely prospect ofachieving concrete benefits by the means
alleged.” The court continued that under In
re Time Warner Securities Litigation, 9 F.3d
259 (2d Cir. 1993), “potential increases inraised revenue from specific stock offerings
establishes a concrete benefit sufficient toestablish motive.”

The court determined that plaintiffs alleged
sufficient facts indicating that defendants had
motive and opportunity to commit fraud withrespect to some of the SEC filings.6 During
the period in question, the company executed
multiple stock offerings, the last of which wason October 19, 2016. The court concluded
that “[a]lleged misrepresentations before thisfinal stock offering could have been motivatedby a desire to bolster capital gained fromthe stock offering.” By contrast, the alleged
misrepresentations after that date could notactually affect any specific stock offerings,
meaning that they could not have been
motivated by a desire to bolster nonexistent
future stock offerings. The court concluded
that, while defendants were authorized toraise more capital until January 2020, a
general authorization to raise more capital (asopposed to a specific stock offering) did not
rise to the level of a concrete benefit sufficientto establish motive.
6. Specifically, the company’s 2015 10-K, Q1 2016 10-Q, and Q2
2016 10-Q filings.
3

Court of Chancery of Delaware:
Denying Dismissal, Court
Could Not Conclude That
De-SPAC Merger Was the
Product of Fair Dealing
On January 4, 2023, the Court of Chanceryof Delaware denied dismissal of a putativeclass action alleging breach of fiduciary duty
claims against the sponsor and directorsof a SPAC who allegedly undertook a value
destructive merger and impaired the publicstockholders’ ability to decide whether toredeem or to invest in the post-merger
company. Delman v. GigAcquisitions3, 2023
WL 29325 (Del. Ch. 2023) (Will, V.C.). The
court determined that it could not conclude
that the de-SPAC merger was the productof fair dealing because plaintiff sufficiently
pleaded that the proxy contained material
misstatements and omitted material,
reasonably available information.

Citing In re MultiPlan Shareholders
Litigation, 268 A.3d 784 (Del. Ch. 2022)7
where Vice Chancellor Will first applied
the entire fairness standard in the SPAC
context, the court determined that entire
fairness applied here “due to inherent
conflicts between the SPAC’s fiduciaries
and public stockholders in the context
of a value-decreasing transaction.” Theessence of the alleged conflicts was that
defendants undertook a value-decreasingtransaction to obtain “colossal” returns on
the sponsor’s investment although the publicstockholders would have been better served
by liquidation. Defendants also allegedly
7. Please click here to read our discussion of the Court ofChancery’s decision in MultiPlan.

provided inadequate disclosures to discourageredemptions and ensure greater deal
certainty.
The court explained that compliance with theduty of disclosure is included within the fairdealing facet of the fairness test. Weinberger
v. UOP, 457 A.2d 701 (Del. 1983). The court
rejected defendants’ contention that theproxy contained all material information.
The court stated that the complaint provided“some facts” that the public stockholders’redemption decisions were compromised
because defendants failed to disclose the cash
per share that the SPAC would invest in the
combined company, and made an incomplete
disclosure of the value that the SPAC and its
non-redeeming stockholders could expect
to receive in exchange. The court notedthat “[b]oth pieces of information would be
essential to a stockholder deciding whether
it was preferable to redeem her funds fromthe trust or to invest them in [the combined
company].”
The court pointed out that if non-redeeming
stockholders were exchanging SPAC sharesworth $10 each, “they could reasonably
expect to receive equivalent value in return.”
However, plaintiff alleged that net cash pershare to be invested in the combined company
was approximately $5.25 per share at thetime the proxy was filed after accounting for“considerable dilution.”8 The court reasoned
that if the SPAC had less than $6 per shareto contribute to the merger, the proxy’s
statement that its shares were worth $10 each
was false or at least materially misleading.
The court concluded that “[b]ecause the Proxy
allegedly misstated and obfuscated the net
cash—and thus the value—underlying [theSPAC’s] shares, public stockholders could not
make an informed choice about whether toredeem or invest.”
Separately, as a second category of disclosure
violations, plaintiff alleged that defendants
overstated the value of the target. Noting that
this value would be highly relevant to the
public stockholders’ investment decisions,the court concluded that the target’s “lofty
projections were not counterbalanced by
8. To determine net cash per share, the court subtracted thecosts plaintiff alleged from the SPAC’s total cash (i.e., thefunds in the trust account plus certain PIPE funds), anddivided that figure by the number of pre-merger shares.
The costs plaintiff alleged included, among other things,
transaction costs of approximately $40 million and the market
value of public warrants totaling approximately $38 million.
4

impartial information.” The court “inferredthat the defendants knew (and shouldhave disclosed) or should have known(but failed to investigate)” that the target’s
production would be difficult to scale aspredicted. Therefore, the court concluded
that it was reasonably conceivable that theboard deprived the public stockholdersof an accurate portrayal of the target’s
financial health, and consequently the publicstockholders could not fairly decide whether it
was preferable to redeem or invest.

District of Columbia: SEC
Seeks Names of Law Firm
Clients Impacted by a 2020
Cyberattack
On January 10, 2023, the SEC filed a request
seeking a court order that would force a
multinational law firm based in Washington,
D.C. to reveal the names of its public company
clients that were impacted by a 2020
cyberattack. Memorandum of Applicant, SEC
v. Covington & Burling, No. 1:23-mc-00002(D.D.C. 2023). The cyberattack affected 298of the firm’s clients, although the firm has
claimed that based on its review only sevenof those clients had material, nonpublic
information affected by the attack. The
SEC is seeking to enforce its March 2022

administrative subpoena demanding thefirm disclose the names of the 298 clients
impacted by the attack.
The SEC is seeking the client names as partof an investigation into “whether any persons
or entities involved in or impacted by the
Cyberattack have been or are engaging inviolations of the federal securities laws.” The
SEC has explained that it seeks informationfrom public companies victimized bycyberattacks for various reasons, including
to identify potential illegal trading either
based on information gathered during theattack or on the fact of the attack itself and to
determine if affected companies have made all
required investor disclosures concerning any
material cybersecurity events.
The SEC claimed that the identity of the firm’s
impacted clients is not protected by the work
product doctrine, because the firm compiled
the list with the business intention of reachingout to clients in the wake of the cyberattack,not in anticipation of litigation. The SEC also
argued that compliance with the subpoena
would not violate D.C. Rule of Professional
Conduct 1.6(a)(1), which generally preventsa lawyer from revealing a client confidenceor secret, because that rule is subject to Rule1.6(e)(2)(a), which “permits the lawyer toreveal client confidences or secrets whenrequired by law or court order.”This edition of the
Securities Law Alert was edited by
Stephen P. Blake / +1-650-251-5153
sblake@stblaw.com
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com andDavid Elbaum / +1-212-455-2861
david.elbaum@stblaw.com

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Los Angeles

Martin S. Bell
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Janet A. Gochman
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rachel.sparksbradley@stblaw.com

Stephen P. Blake
Partner+1-650-251-5153
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Washington, D.C.

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