Securities Law Alert
Year in Review:• Supreme Court Decisions• Circuit Court Decisions Addressing Class Certification• Circuit Court Decisions Addressing Actionable Misstatements and Omissions• Circuit Court Decisions Addressing Scienter• Circuit Court Decisions Addressing Loss Causation• Circuit Court Decisions Addressing the Application of Morrison• Circuit Court Decisions Addressing Insider Trading Liability• Circuit Court Decisions Addressing ERISA Claims• Other Notable Circuit Court Decisions• Significant Delaware Supreme Court Decisions• Significant New York Court of Appeals Decisions

Supreme Court Decisions
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2018

Simpson Thacher & Bartlett LLPSupreme Court Unanimously
Upholds State Court Jurisdiction
Over Class Actions Alleging Only
Claims Under the Securities Act
of 1933
On March 20, 2018, the Supreme Court
unanimously held that state courts havejurisdiction over class actions alleging only
violations of the Securities Act of 1933 (“theSecurities Act”). Cyan v. Beaver Cty. Emp.
Ret. Fund, 138 S. Ct. 1061 (2018) (Kagan, J.).
The Court rejected the issuer’s argument that
the Securities Litigation Uniform Standards

2018
Act (“SLUSA”), passed in 1998, eliminated thejurisdiction of state courts to hear such classactions. In resolving a split among state andfederal courts, the Court likewise rejected a
middle-of-the-road position advanced by the
Solicitor General that such actions should be
removable from state to federal court.
Prior to SLUSA’s enactment, federal andstate courts had concurrent jurisdiction
over actions asserting Securities Act
claims pursuant to 15 U.S.C. § 77v(a).
SLUSA amended Section 77v(a) to add
the italicized language: “The district
courts of the United States . . . shall havejurisdiction . . . concurrent with State andTerritorial courts, except as provided in[S]ection 77p of this title with respect tocovered class actions, of all suits in equity
and actions at law brought to enforce any
liability or duty created by” the Securities
Act. The central dispute in Cyan was whether
Section 77v(a)’s reference to “covered classactions” pointed to the definition of that termin 15 U.S.C. § 77p(f)(2) of SLUSA. If it did,the issuer argued, state courts would not havejurisdiction over such class actions brought
under the Securities Act.
The Court determined that if Congress had
wanted to refer to § 77p(f)(2), it would havedone so. The Court further explained that§ 77p(f)(2) provides a definition (of “coveredclass action”), not an exception to concurrent
jurisdiction. The Court found that, by its
terms, § 77p only prevents certain classactions based on state law from being heard
in state courts, and that nothing in the text
prevents a state court from hearing classactions based exclusively on federal law.

Section 78u-6 of the Dodd-Frank Act
defines a “whistleblower” as “any individual
who provides . . . information relating toa violation of the securities laws to theCommission, in a manner established, byrule or regulation, by the Commission.”
15 U.S.C. § 78u-6(a)(6) (emphasis added).
The same section creates anti-retaliation
provisions for “whistleblowers,” prohibiting
employers from firing employees who“mak[e] disclosures that are requiredor protected under the Sarbanes-Oxley
Act of 2002,” among other things.
15 U.S.C. § 78u-6(h)(1)(A)(iii). In 2011, theSEC promulgated a rule that, for purposesof the Dodd-Frank Act’s anti-retaliation
protections, interpreted “whistleblower” toinclude employees who make only internal
disclosures of potentially wrongful activity.
17 C.F.R. § 240.21F-2(a)(1).

The Court also held that § 77p(c) of SLUSA
does not permit the removal of class actions
alleging only Securities Act claims fromstate to federal court because that provision
addresses class actions described in § 77p(b).
The Court found that § 77p(b) refers tostate-law class actions, which are removableto federal court (after which they are to bedismissed), not federal-law class actions
asserting Securities Act claims.

Dodd-Frank’s Anti-Retaliation
Provisions Apply Only to Employees
Who Report Allegedly Wrongful
Activity to the SEC
On February 21, 2018, the Supreme Court
unanimously held that the anti-retaliation
protections created by the Dodd-Frank WallStreet Reform and Consumer Protection
Act (“Dodd-Frank Act”) do not apply to an
employee who internally reports allegedly
wrongful activity but fails to report theactivity to the SEC. Digital Realty Trust v.
Somers, 138 S. Ct. 767 (2018) (Ginsburg, J.)(Digital Realty Trust II). The Court’s decision
resolved a split between the Second, Fifth andNinth Circuits.1
1. Compare Somers v. Digital Realty Trust, 850 F.3d 1045 (9thCir. 2017) (Dodd-Frank Act’s anti-retaliation provisions apply
to employees who report alleged misconduct internally), andBerman v. Neo@Ogilvy, 801 F.3d 145 (2d Cir. 2015) (same)with Asadi v. G.E. Energy (USA), 720 F.3d 620 (5th Cir.
2013) (Dodd-Frank Act’s anti-retaliation provisions apply only
to individuals who provide information to the SEC).

The Supreme Court found that the “definition
section of the statute supplies an unequivocal
answer” to the issue of the meaning andreach of the term “whistleblower” in the
Dodd-Frank Act’s anti-retaliation provisions.
The Court emphasized that the definition
requires reporting “to the Commission,”and that the statutory text instructs “thatthe ‘definition shall apply’ ‘in this section,’that is, throughout § 78u-6.” Digital
Realty Trust II, 138 S. Ct. 767 (quoting
15 U.S.C. § 78u-6(a)(6)). The Court further
noted that “when Congress includes particularlanguage in one section of a statute but omits
it in another, . . . this Court presumes that
Congress intended a difference in meaning.”
Because Congress placed a governmentreporting requirement in § 78u-6 but notelsewhere in the Dodd-Frank Act, the Court
concluded that Congress intended that thedefinition of “whistleblower” cover only
individuals who report potentially wrongfulactivity to the SEC.
2

American Pipe Does Not Permit
Unnamed Class Members toBring a New Class Action Afterthe Expiration of the Applicable
Limitations Period
On June 11, 2018, the Supreme Court
unanimously held that the tolling ofindividual claims established in American
Pipe & Constr. Co. v. Utah, 414 U.S. 538(1974), does not toll limitations periods for
successive class claims.2 China Agritech v.
Resh, 138 S. Ct. 1800 (2018) (Ginsburg, J.).
Thus, individual claimants who could invoke
American Pipe tolling for their individual
claims may not bring putative class claims
if such class claims would be barred by theapplicable statute of limitations.
The Court explained that the goals of“‘efficiency and economy of litigation’ that
support tolling of individual claims” under
American Pipe “do not support maintenanceof untimely successive class actions.” Instead,the Court noted that class claims should bemade soon after the first action seeking classcertification. The Court reasoned that while
economy of litigation favors delaying thelimitation period until class certification isdenied because certification would eliminate
the need for individually asserted claims,
the opposite is true for competing classrepresentative claims: when class treatment
is appropriate, it is best for all possible
representatives to be known so the district
court can select the best plaintiff.
The Court also explained that plaintiffs
usually must show they have been diligent
in pursuing their claims to benefit fromequitable tolling. The Court stated thata “would-be class representative whocommences suit after expiration of thelimitation period . . . can hardly qualify as
diligent in asserting claims and pursuing
relief.” In addition, the Court expressed
concern that applying American Pipe tollingto successive class claims would permit
the statute of limitations to be extended
indefinitely, noting that “[e]ndless tolling of astatute of limitations is not a result envisionedby American Pipe.”

2. The American Pipe Court held that “the commencement of aclass action suspends the applicable statute of limitations as toall asserted members of the class who would have been parties
had the suit been permitted to continue as a class action.” 414
U.S. 538 (1974).

Circuit Court Decisions
Addressing Class Certification
Second Circuit: Courts Must
Consider Price Impact Evidence at
the Class Certification StageOn January 12, 2018, the Second Circuit
vacated class certification in a securities fraud
action based, inter alia, on its determinationthat the district court “erred in declining toconsider” defendants’ price impact evidence
at the class certification stage. Arkansas
Teachers Ret. Sys. v. Goldman Sachs Grp.,
879 F.3d 474 (2d Cir. 2018) (Wesley, J.).
The Second Circuit found the district court
erroneously “construed this evidence as
an inappropriate truth on the market
defense or as evidence of the statements’lack of materiality, neither of which thecourt thought it could consider at the classcertification stage.”
The Second Circuit explained that “[t]he‘truth on the market’ defense attacks thetiming of the plaintiffs’ purchase of shares”
on the theory that “the market was alreadyaware of the truth regarding defendants’misrepresentations at the time the classmembers purchased their shares.” Here, it
was “undisputed that plaintiffs purchased
their shares after the misstatements weremade but before the truth was revealed.” The
Second Circuit found that “defendants did
not present a ‘truth on the market’ defense”
but instead presented evidence that alleged“conflicts of interest ‘did not actually affectthe stock’s market price.’” Id. (quoting
Halliburton Co. v. Erica P. John Fund, 134 S.
Ct. 2398 (2014)).
The Second Circuit also distinguishedprice impact from materiality. The court
observed that while “price impact touches
on materiality, which is not an appropriate
consideration at the class certification
stage, it differs from materiality” insofar
as price impact concerns “the effect of amisrepresentation on a stock price.” The court
explained that “[w]hether a misrepresentation
was reflected in the market price at the timeof the transaction—whether it had priceimpact—‘is Basic’s fundamental premise.
It … has everything to do with the issue
of predominance at the class certification
stage.’” Id. (quoting Halliburton, 134 S. Ct.
2398). The Second Circuit emphasized that
if an alleged misrepresentation did not affect3

the stock price, there would be no basis
for plaintiffs to assert that they indirectlyrelied on that misrepresentation through themarket price. On remand, the district court
found that defendants “failed to establish,
by a preponderance of the evidence, that thealleged misstatements had no price impact.”
In re Goldman Sachs Grp. Sec Litig., 2018
WL 3854757 (S.D.N.Y. Aug. 14, 2018).
Defendants have appealed.

Circuit Court Decisions
Addressing Actionable
Misstatements andOmissionsThird Circuit: A Company Has No
Stand-Alone Obligation to Disclose
Alleged Regulatory Violations by an
Affiliated Entity
On November 14, 2018, the Third Circuit
affirmed dismissal of a securities fraud
action alleging that a company failed todisclose regulatory violations by an affiliatedentity. City of Cambridge Ret. Sys. v.
Altisource Asset Mgmt. Corp., 908 F.3d 872(3d Cir. 2018) (Fisher, J.). The Third Circuit
found “no authority to support the conclusionthat [the defendant company] was obligatedto disclose the flaws of a separate entity in its
own filings.”
The Third Circuit further determined that
alleged misstatements made by any entities
affiliated with the defendant company had no“legal significance” with respect to plaintiffs’
Rule 10b-5 claims under the Supreme Court’s
decision in Janus Capital Grp. v. First
Derivative Traders, 564 U.S. 135 (2011),
which limits Rule 10b-5(b) liability to “theperson or entity with ultimate authority overthe statement.”3
3. Please click here to read our discussion of the Supreme Court’s
decision in Janus.

Fourth Circuit: Once a Company
Decides to Speak on a Topic, theCompany Has a Duty to Disclose All
Material Information Concerning
That Topic
On February 22, 2018, the Fourth Circuit
revived a dismissed securities fraud action
alleging that a medical device company failed
to disclose its fraudulent insurance coding
scheme. Singer v. Reali, 883 F.3d 425 (4thCir. 2018) (King, J.). Because the company
chose “to speak about its reimbursement
practices,” the court found plaintiffs
adequately alleged that the company had “aduty to disclose its alleged illegal conduct” inconnection with those practices.
The Fourth Circuit rejected defendants’argument that there were no allegations
that any court or government agency had
deemed the reimbursement scheme illegal.
The court explained that “the duty to disclose
may extend to uncharged and unadjudicatedillegal conduct.”
The Fourth Circuit also found meritlessdefendants’ contention that the company
had never “specifically asserted it wascomplying with a particular law.” The court
noted that plaintiffs did not rely on “meregeneric assertions of legal compliance.”
Rather, plaintiffs based their claim on“the [c]ompany’s choice to speak about its
reimbursement practices . . . without tellingthe whole, material truth.”

Fifth Circuit: Statements
Concerning Transparency, Quality
and Corporate Responsibility Are
Inactionable Puffery
On October 3, 2018, the Fifth Circuit affirmed
dismissal of a securities fraud action alleging
that a grocery retailer made misstatements
concerning the company’s “commitment
to transparency, quality and corporate
responsibility,” among other alleged4misstatements. Emps. Ret. Sys. v. Whole
Foods Mkt., 905 F.3d 892 (5th Cir. 2018)(King, J.). The court held these “generalizedstatements” constituted inactionable pufferyeven though the retailer had “built a brandaround holding itself to higher ethicalstandards than its competitors.” The court
found that a “reasonable investor” would notassess the company’s value based on such
“self-serving statements.” Rather, reasonable
investors would “rely on facts to determine
whether” the company is in fact “transparent
and otherwise holds itself to high standards.”

Tenth Circuit: A Company Has
No Duty to Disclose Preliminary
Merger Discussions Provided
It Does Not Say Anything“Inconsistent” With the Existenceof Such Discussions
On May 11, 2018, the Tenth Circuit heldthat an energy company and its executives
had no duty to disclose preliminary merger
discussions with a competing energy firm
because defendants had not made any
statements that were “inconsistent” with thepossibility that the company was engaging
in such discussions. Emps. Ret. Sys. of
Rhode Island v. Williams Cos., 889 F.3d
1153 (10th Cir. 2018) (Hartz, J.). The courtemphasized that “Rule 10b-5 does ‘not create
an affirmative duty to disclose any and allmaterial information.’” Id. (quoting Matrixx
Initiatives v. Siracusano, 563 U.S. 27 (2011)).
Rather, Rule 10b-5 requires disclosure “onlywhen necessary to make statements made, inthe light of the circumstances in which they
were made, not misleading.” Id. (quoting
Matrixx, 563 U.S. 27).
The court further found that the merger
discussions were not material under the
probability/magnitude test set forth in
Basic v. Levinson, 485 U.S. 224 (1988). The
Tenth Circuit explained that Basic’s “factspecific” inquiry requires courts to “analyze
the probability that a merger will succeed
and the magnitude of the transaction.” The
Tenth Circuit stated that “merger discussions
are generally not material in the absenceof a serious commitment to consummate
the transaction.” In the case before it, thecourt noted that there were no allegationsof “concrete offers, specific discussions, oranything more than vague expressions ofinterest.” The Tenth Circuit determined thatthe allegations were “fully consistent withthere being no commitment whatsoever.”Circuit Court Decisions
Addressing ScienterFirst Circuit: Allegations That a
Pharmaceutical Company Was
Dependent on Offerings to Fund
Its Operations Were Insufficient toPlead Scienter
On April 4, 2018, the First Circuit rejected
plaintiffs’ efforts to plead scienter byalleging that a pharmaceutical company
was “dependent upon offerings to fund its
operations” because it was “in a race for FDA
approval” and was “generating no significant
revenue.” Kader v. Sarepta Therapeutics,
887 F.3d 48 (1st Cir. 2018) (Torruella, J.).
The court explained that it has “set a high bar
for arguments of this sort.” To plead scienter
based on a motive to boost the company’s
stock price, plaintiffs must allege “something
more than the ever-present desire to improve
results, such as allegations that the very
survival of the company was on the line.”
In the case before it, the First Circuit foundthe complaint “bereft of allegations that[the company] was financially on the ropes,or that it would shutter its doors unless it
padded earnings by deceiving investors.” Thecourt recognized that the company’s initialpublic offering may have “generated revenue
that proved useful to [the company] in its race
for FDA approval, so as to secure the firstmover advantage.” However, the First Circuit
held that this “alone cannot bear the weightof an inference of scienter that is at least ascompelling as any other.”5Third Circuit: Affirms Dismissalof a Securities Fraud Class Action
Where the Allegations Suggested
Mismanagement Rather Than
Fraud
On September 20, 2018, the Third Circuit
affirmed dismissal of a securities fraudclass action against a car rental company
brought on the heels of an acknowledgement
in an SEC filing that a “sometimes
inappropriate tone at the top . . . may have
led to inappropriate accounting decisions.”
In re Hertz Global Holdings, 905 F.3d
106 (3d Cir. 2018) (Jordan, J.). The Third
Circuit held the district court did not err ininterpreting this statement as “an admissionof ‘mismanagement,’ as opposed to an
admission of ‘misconduct.’” The Third Circuit
found the allegations did not “necessarily
suggest” that defendants were “engaged ina systematic fraud.” The court determinedthat it was “[m]ore plausible . . . thatthe [i]ndividual [d]efendants were justbad leaders.”
The Third Circuit found that “any inferenceof scienter was circumscribed by the fact thatthe accounting errors were spread acrossmyriad accounting categories.” The court also
placed no weight on the allegation that theindividual defendants certified the accuracyof the company’s SEC filings, as plaintiffs
did not allege that any defendant “knew hewas signing a false SEC filing or recklessly
disregarded inaccuracies” in the filings. The
court also determined that the alleged insider
trading activity did not support a strong
inference of scienter because the individual
defendants did not sell their holdings when
the stock was trading at its peak. Moreover,the court placed no weight on allegations thatthe individual defendants “each resigned inclose proximity to the public release of bad
news.” The court reasoned that “[c]hanges
in leadership are only to be expected whenleadership fails.”

Ninth Circuit: Generalized
Allegations of an IPO-Related
Motive to Boost Profitability Are
Insufficient to Plead Scienter
On March 8, 2018, the Ninth Circuit heldthat generalized allegations of a motive toboost a company’s financial performancein the months before and after an IPO are
insufficient to meet the high bar for pleading

scienter. Webb v. SolarCity Corp., 884 F.3d
844 (9th Cir. 2018) (Smith, Jr., J.). In thecase before it, the Ninth Circuit found thatplaintiffs’ IPO-related motive allegations wereneither “specific” nor “particularized,” butinstead spoke to the type of “routine corporate
objectives” that it has rejected in the past. The
court explained that “[s]urely every company
that goes public wants to maximize its
apparent profitability prior to its IPO and tomaintain a high share price afterward in order
to finance acquisitions and expand.”Circuit Court Decisions
Addressing Loss Causation
Fourth Circuit: Allegations ofPartial Disclosures May Be
Sufficient to Plead Loss Causation
On February 22, 2018, the Fourth Circuit
found plaintiffs adequately alleged losscausation based on partial disclosuresconcerning a government subpoena into
the company’s reimbursement practices.
Singer v. Reali, 883 F.3d 425 (4th Cir. 2018)(King, J.). The court stated that “neither asingle complete disclosure nor a fact-for-fact
disclosure of the relevant truth to the market
is a necessary prerequisite to establishingloss causation.” The court further stated that“partial disclosures need not precisely identify
the misrepresentation or omission” but “mustat least relate back to the misrepresentationor omission and not to some other negative
information about the company.”

Ninth Circuit: Disclosure of theAlleged Fraud Is Not a Prerequisite
for Loss Causation
On January 31, 2018, the Ninth Circuit heldthat “a general proximate cause test . . . is theproper test” for loss causation under Section
10(b) and Rule 10b-5 and that disclosureof the fraud is not a prerequisite for losscausation. Mineworkers’ Pension Schemev. First Solar, 881 F.3d 750 (9th Cir. 2018)(per curiam).
The Ninth Circuit stated that in order“[t]o prove loss causation, plaintiffs need only
show a causal connection between the fraud
and the loss, by tracing the loss back to thevery facts about which the defendant lied.”
The court explained that “[r]evelation of
6

ultimately be found not liable for causing
the loss in value to the ADRs does not meanthat the [Exchange] Act is inapplicable tothe transactions.”

fraud in the marketplace is simply one of theinfinite variety of causation theories a plaintiff
might allege to satisfy proximate cause.” Thecourt noted that if “a stock price drop comes
immediately after the revelation of fraud,”
this “can help to rule out alternative causes.”
However, the Ninth Circuit stated that“[a] plaintiff may also prove loss causationby showing that the stock price fell upon therevelation of an earnings miss, even if themarket was unaware at the time that fraud
had concealed the miss.”

Circuit Court Decisions
Addressing the Applicationof Morrison
Ninth Circuit: Morrison Does Not
Preclude Section 10(b) Claims
Concerning Domestic Transactionsin Unsponsored ADRs
On July 17, 2018, the Ninth Circuit foundthe district court “misapplied” Morrison
v. Nat’l Australia Bank, 561 U.S. 247(2010), in holding that Section 10(b) does
not reach securities fraud claims involving
domestic transactions in unsponsoredAmerican Depositary Receipts and Shares(“ADRs”), which are issued with little or no
involvement by the foreign issuer.4 Stoyas v.
Toshiba Corp., 896 F.3d 933 (9th Cir. 2018)(Wardlaw, J.). The Ninth Circuit emphasizedthat under Morrison, courts must “examine
the location of the transaction[;] it does notmatter that a foreign entity was not engaged
in the transaction.” The court stated thatthe possibility that a foreign issuer “may4. In Morrison, 561 U.S. 247, the Supreme Court held that
Section 10(b) applies only to (1) “transactions in securities
listed on domestic exchanges,” and (2) “domestic transactionsin other securities.”

The Ninth Circuit expressly disagreed with
the Second Circuit’s holding in Parkcentral
Global Hub v. Porsche Automobile Holdings,
763 F.3d 198 (2d Cir. 2014), that “a domestictransaction is necessary but not necessarily
sufficient to make § 10(b) applicable.”5 The
Ninth Circuit found Parkcentral’s approach“contrary to Section 10(b) and Morrison
itself” because it “carves out ‘predominantly
foreign’ securities fraud claims from Section
10(b)’s ambit, disregarding Section 10(b)’stext.” The Ninth Circuit further found that“Parkcentral’s analysis relies heavily on theforeign location of the allegedly deceptive
conduct, which Morrison held to beirrelevant to the Exchange Act’s applicability,
given Section 10(b)’s exclusive focus
on transactions.”

Circuit Court Decisions
Addressing Insider Trading
Liability
Second Circuit: Gifting Confidential
Information With an Intent to
Benefit the Tippee Satisfies Dirks’Personal Benefit Requirement,
Even If the Tipper Does Not Have a
Relationship With the Tippee
On June 25, 2018, the Second Circuit heldthat Dirks’ personal benefit requirement canbe satisfied with evidence that the tipper
gifted confidential information with an intent
to benefit the tippee, even in the absence ofevidence of a personal relationship between
the tipper and the tippee.6 U.S. v. Martoma,
894 F.3d 64 (2d Cir. 2018) (Katzmann, C. J.).
The court reasoned that Dirks’ “personal
benefit requirement is designed to test
the propriety of the tipper’s purpose.” Thecourt found that “it makes perfect sense to
5. Please click here to read our discussion of the Second Circuit’s
decision in Parkcentral.
6. In Dirks v. S.E.C., 463 U.S. 646 (1983), the Supreme Court
held that the “test” for tippee liability is “whether the insider[the tipper] personally will benefit, directly or indirectly,
from his disclosure.” The Dirks Court stated that “there may
be a relationship between the insider and the recipient thatsuggests a quid pro quo from the latter, or an intention tobenefit the particular recipient.”
7

permit the government to prove a personal
benefit with objective evidence of the
tipper’s intent, without requiring in every
case some additional evidence of the tippertippee relationship.” The court stated that“[t]he tipper’s intention to benefit the tippee
proves a breach of fiduciary duty because it
demonstrates that the tipper improperly used
inside information for personal ends and thus
lacked a legitimate corporate purpose.”a separate standard for analyzing insiderinformation claims, pursuant to which “‘aplaintiff must plausibly allege an alternative
action that the defendant could have takenthat would have been consistent with thesecurities laws and that a prudent fiduciaryin the same circumstances would not haveviewed as more likely to harm the fund thanto help it.’” Id. (quoting Fifth Third, 134 S.
Ct. 2459).

Circuit Court Decisions
Addressing ERISA Claims

Other Notable Circuit
Court Decisions

Fifth Circuit: (1) Fifth Third Applies
to Claims of Excessive Riskiness,and (2) Failure to Disclose Inside
Information Does Not Constitutea “Special Circumstance” Under
Fifth Third

Ninth Circuit: Misstatement
Claims Under Section 14(e) of the
Exchange Act Require Only Proof of
Negligence, Not Scienter

On February 6, 2018, the Fifth Circuit heldthat the Supreme Court’s decision in Fifth
Third Bancorp v. Dudenhoeffer, 134 S.
Ct. 2459 (2014), applies to ERISA claims
alleging that company stock was excessively
risky in addition to claims that the stock was
overvalued.7 Singh v. RadioShack Corp., 882
F.3d 137 (5th Cir. 2018) (per curiam). The
Fifth Circuit found “‘illusory’” the “distinction
between” these two types of ERISA claims.
The court reasoned that “[i]n an efficient
market, market price accounts for risk.”
The Second, Sixth and D.C. Circuits havealso held that Fifth Third applies to ERISA
claims alleging claims based on allegedly
excessive risk.8
The Fifth Circuit further held that plaintiffs
cannot satisfy Fifth Third’s “special
circumstances” exception for claims based on
publicly available information by alleging that
defendants “withheld material informationfrom the market, skewing the stock price.”
The court found that failure to disclose inside
information does not constitute a “special
circumstance” because Fifth Third established
7. In Fifth Third, the Court outlined the standards for pleading
an ERISA breach of the duty of prudence claim against
the fiduciary of an employee stock ownership plan. Pleaseclick here to read our discussion of the Supreme Court’s
decision in Fifth Third.
8. See Pfeil v. State Street Bank and Trust Co., 806 F.3d 377 (6thCir. 2015); Rinehart v. Lehman Bros. Holdings, 817 F.3d 56(2d Cir. 2016); Coburn v. Evercore Trust Co., 844 F.3d 965(D.C. Cir. 2016).

On April 20, 2018, the Ninth Circuit held thatthe first clause of Rule 14(e), which prohibitsmaterial misstatements in connection
with tender offers, requires only proof of
negligence, rather than scienter.9 Varjabedianv. Emulex Corp., 888 F.3d 399 (9th Cir. 2018)(Marguia, J.). Five other circuits to consider
this question have relied on similarities
between the first clause of Rule 14(e) and Rule10b-5(b) to hold that a scienter requirement
applies to Rule 14(e) claims.10 The Ninth
Circuit departed from these decisions
based on its determination that “importantdistinctions exist between Rule 10b-5 andSection 14(e)” that “strongly militate against
importing the scienter requirement from thecontext of Rule 10b-5 to Section 14(e).”9. Rule 14(e), titled Untrue statement of material fact oromission of fact with respect to tender offer, provides in
relevant part:
It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state a material
fact necessary in order to make the statements made,in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent,
deceptive, or manipulative acts or practices, inconnection with any tender offer or request or
invitation for tenders, or any solicitation of security
holders in opposition to or in favor of any such offer,
request, or invitation.
15 U.S.C. §78n(e). Rule 14(e) was added as an amendment to
the Securities Exchange Act of 1934 pursuant to the Williams
Act.
10. See Chris-Craft Indus. v. Piper Aircraft Corp., 480 F.2d 341(2d Cir. 1973); Smallwood v. Pearl Brewing Co., 489 F.2d
579 (5th Cir. 1974); In re Digital Island Sec. Litig., 357 F.3d
322 (3d Cir. 2004); SEC v. Ginsburg, 362 F.3d 1292 (11th Cir.
2004); Adams v. Standard Knitting Mills, 623 F.2d 422 (6thCir. 1980).
8

The Ninth Circuit explained that Rule10b-5(b)’s scienter requirement is based
not on the text of the rule itself but on thelanguage of Section 10(b), pursuant to which
Rule 10b-5 was promulgated. The court foundthat “Section 14(e) differs fundamentallyfrom Section 10(b)” because the SEC may
regulate non-fraudulent conduct under
Section 14(e). The Ninth Circuit observed that“[i]f the SEC can prohibit acts themselves
not fraudulent under Section 14(e), thenit would be somewhat inconsistent toconclude that Section 14(e) itself reaches only
fraudulent conduct requiring scienter.” Thecourt concluded that “because the text of thefirst clause of Section 14(e) is devoid of any
suggestion that scienter is required, . . . thefirst clause of Section 14(e) requires a showing
of only negligence, not scienter.”[a] document itself is susceptible to judicial
notice does not mean that every assertionof fact within that document is judicially
noticeable for its truth.”Second, the Ninth Circuit reaffirmed that“a defendant may seek to incorporate adocument into the complaint ‘if the plaintiff
refers extensively to the document or the
document forms the basis of the plaintiff’s
claim.’” Id. (quoting United States v. Ritchie,
342 F.3d 903 (9th Cir. 2003)). The court
stated that there are “rare instances whenassessing the sufficiency of a claim requiresthat [a] document [not mentioned in thecomplaint] be reviewed, even at the pleading
stage.” But the Ninth Circuit instructed that
“if the document merely creates a defense to
the well-pled allegations in the complaint,
then that document did not necessarily form
the basis of the complaint.” The Ninth Circuit
further stated that “it is improper to assume
the truth of an incorporated document if suchassumptions only serve to dispute facts statedin a well-pleaded complaint.”

Significant Delaware Supreme
Court Decisions

Ninth Circuit: Limits the Extent toWhich Courts Can Rely on Judicial
Notice and the Incorporation-byReference Doctrine to Consider
Extrinsic Documents at the
Pleading Stage

Board Was Required to Disclose the
Chairman’s Reasons for Abstaining
From a Board Vote on the Sale of
the Company

On August 13, 2018, the Ninth Circuit
addressed what it found to be a “concerning
pattern in securities cases” in which
defendants “improperly” utilize judicial noticeand the incorporation-by-reference doctrine“to defeat what would otherwise constituteadequately stated claims at the pleading
stage.” Khoja v. Orexigen Therapeutics, 899
F.3d 988 (9th Cir. 2018) (Tashima, J.). The
Ninth Circuit “clarif[ied] when and how the
district court[s] should consider materials
extraneous to the pleadings at the motion todismiss stage.”

On February 20, 2018, the Delaware
Supreme Court reversed dismissal of ashareholder action alleging that the boardof directors failed to disclose the reasons
why the chairman of the board, who wasalso the company’s founder, abstained froma board vote on the sale of the company.
Appel v. Berkman, 180 A.3d 1055 (Del. 2018)(Strine, C. J.). The court rejected defendants’contention that “the reasons for a dissenting
or abstaining board member’s vote cannever be material.” The court explainedthat “when, as here, a board expresses its
reasons for voting in favor of a transaction,
the contrary view of an individual board
member may be material to a stockholder
wrestling with whether to accept the board’s
recommendation.”First, the Ninth Circuit stated that “a court
cannot take judicial notice of disputed
facts contained in . . . public records.” The
Ninth Circuit reasoned that “[j]ust because

The Delaware Supreme Court emphasizedthat its “decision in no way implies that thereason for a particular director’s dissent
or abstention will always be material.”
9

Rather, the court reaffirmed the “contextual
approach” for determining whether
disclosure “would materially affect the mixof information, or whether the disclosure isrequired to make sure that other disclosures
do not present a materially misleading
picture.” In the case before it, the Delaware
Supreme Court determined that “the founderand [c]hairman’s views regarding the wisdomof selling the company were ones thatreasonable stockholders would have foundmaterial in deciding whether to vote for themerger or seek appraisal, and the failure todisclose them rendered the facts that weredisclosed misleadingly incomplete.”

Corwin’s Cleansing Rule Is
Inapplicable If the Disclosures
Omitted Material Facts That a
Reasonable Stockholder Would
Have Considered Important in
Deciding How to Vote
On July 9, 2018, the Delaware Supreme Court
reversed dismissal of a shareholder classaction challenging a take-private transaction
on the grounds that the disclosures omitted
material information concerning a sideagreement between the company’s founder
and the acquiror. Morrison v. Berry, 191 A.3d268 (Del. 2018) (Valihura, J.). The Delaware
Supreme Court held that “partial and elliptical
disclosures cannot facilitate the protectionof the business judgment rule under the
Corwin doctrine,” particularly in transactions
involving the sale of the company.

MFW’s Ab Initio Requirement
Is Satisfied if the Controller
Conditions the Transaction on
MFW’s Procedural Protections
Before the Commencement of
Substantive Economic Negotiations
On October 9, 2018, the Delaware Supreme
Court held that MFW does not impose abright-line rule requiring a controllingstockholder to condition a proposedtransaction on the satisfaction of MFW’s
two “key procedural protections” in thecontroller’s initial offer. Flood v. Synutra
Int’l, 195 A.3d 754 (Del. 2018) (Strine, C.J.).
The court found MFW’s ab initio requirement
is satisfied if the controller “conditions its
bid on [these] protections at the beginningstages of the process . . . before any economic
negotiations commence.”
The Delaware Supreme Court further heldthat if the transaction satisfies the MFW
standard, then plaintiffs can state a dutyof care claim only by alleging that theindependent special committee acted withgross negligence. Plaintiffs cannot pleada duty of care violation based solely on anallegedly inadequate deal price. Notably,
the Delaware Supreme Court expressly
overruled MFW’s footnote 14 to the extent
it suggests that “a due care violation can bepremised . . . on a court’s after the fact sensethat the committee should have extracted
more price concessions.”

The Delaware Supreme Court explained thatthe key inquiry is “whether the stockholder
vote was fully informed—that is, whether
the [c]ompany’s disclosures apprised
stockholders of all material information anddid not materially mislead them.” The court
stated that “this materiality test does not
require proof of a substantial likelihood that
disclosure of the omitted fact would havecaused the reasonable investor to change
his vote.” Rather, “[o]mitted information ismaterial if there is a substantial likelihoodthat a reasonable stockholder would
have considered the omitted information
important when deciding whether to tender
her shares or seek appraisal.” The Delaware
Supreme Court cautioned that “[c]areful
application of Corwin is important due to its
potentially case-dispositive impact.”10Significant New York Court ofAppeals Decisions
New York Court of Appeals: ThreeYear Statute of Limitations Applies
to Martin Act Claims
On June 12, 2018, the New York Court ofAppeals (the “Court of Appeals”) held thatclaims brought under the Martin Act, New
York’s blue sky law, are governed by thethree-year statute of limitations set forthin New York Civil Practice Law and Rules(“CPLR”) 214(2), which applies to actions “torecover upon a liability, penalty or forfeiture
created or imposed by statute.” People bySchneiderman v. Credit Suisse Sec. (USA),
31 N.Y.3d 622 (N.Y. 2018) (DiFiore, C.J.). The
Court of Appeals reversed the ruling of theAppellate Division, First Department, which
held that the six-year statute of limitations set

forth in CPLR 213(8) for actions “based upon
fraud” applies to Martin Act claims. The Courtof Appeals also found CPLR 213(1), which
establishes a six-year statute of limitations foractions “for which no limitation is specificallyprescribed by law,” inapplicable to Martin
Act claims.
The Court of Appeals explained that CPLR
214(2)’s three-year statute of limitations
applies “where liability would not exist but
for a statute.” CPLR 214(2) does not apply
to “claims which, although provided for ina statute, merely codify or implement an
existing common law liability.” The Court ofAppeals found that “the Martin Act covers
some fraudulent practices not prohibited
elsewhere in statutory or common law.”
Consequently, the Court of Appeals held thatthe three-year statute of limitations set forthin CPLR 214(2) “governs Martin Act claims.”

This edition of the
Securities Law Alert was edited by
Paul C. Gluckow
pgluckow@stblaw.com / +1-212-455-2653,
Peter E. Kazanoffpkazanoff@stblaw.com / +1-212-455-3525,
and Jonathan K. Youngwood
jyoungwood@stblaw.com / +1-212-455-3539.

11

New York

Los Angeles

Brooke E. Cucinella+1-212-455-3070
brooke.cucinella@stblaw.com

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
pcurnin@stblaw.com

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

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

Stephen M. Cutler+1-212-455-2773
stephen.cutler@stblaw.com

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

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

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

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

Palo Alto

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

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

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

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

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

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

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

David Elbaum
Senior Counsel+1-212-455-2861
david.elbaum@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com
Linton Mann III+1-212-455-2654
lmann@stblaw.com
Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

Janet A. Gochman
Senior Counsel+1-212-455-2815
jgochman@stblaw.com

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
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

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13