Securities Law Alert
In This Edition:• Ninth Circuit: Applies Omnicare Standard to Pleading Falsity of Opinion in Section 14(a) Claims• Ninth Circuit: Joins Other Circuits in Holding That Reliance on General Economic Principles Without
More Is Not Enough to Plead a Duty-of-Prudence Violation Under Fifth Third• Northern District of Illinois: Items 105 and 303 Impose a Duty to Disclose an Alleged Years-Long
Bribery Scheme as Regulatory Noncompliance• Southern District of Texas: Denies Dismissal of Class Action Alleging Defendants Made
Misrepresentations to Obtain Shareholder Approval for a De-SPAC Transaction
May 2021

Ninth Circuit: Applies
Omnicare Standard to
Pleading Falsity of Opinion in
Section 14(a) Claims

Simpson Thacher’s“work is top-notch”
and the Firm is “vastly
experienced in complex
litigation.”– Chambers USA(quoting a client)On April 20, 2021, the Ninth Circuit affirmed
the dismissal of a putative securities classaction alleging misrepresentations andomissions in a proxy statement used to secureshareholder approval for the sale of the
defendant company in violation of Section
14(a), Section 20(a) and Rule 14a-9. Golub
v. Gigamon, 2021 WL 1539954 (9th Cir.
2021) (Wardlaw, J.).1 The court held that it
would apply the standards for actionability
for falsity under Section 11 explained in
Omnicare v. Laborers District Council
Construction Industry Pension Fund, 575
U.S. 175 (2015), to falsity of a statement of
opinion under SEC Rule 14a-9 through either
a misrepresentation-of-material-fact theory
or an omission-of-material-fact theory.
1. The Ninth Circuit’s discussion of the applicable standard
appeared in this published opinion, while its application of
the standard to the instant facts appeared in an unpublishedmemorandum. See Golub v. Gigamon, No. 19-16975, 2021 WL
1554439 (9th Cir. 2021).

Simpson Thacher & Bartlett LLP

Background
Plaintiff claimed that the company, its
CEO, and its board violated Section 14(a)and SEC Rule 14a-9 when they released
a materially false and misleading proxystatement to obtain stockholder support
for a proposed sale of the company,
allegedly at an undervalued price. Plaintiff
alleged that the proxy statement contained
misrepresentations of fact and omissions
that made certain statements of opinion in
the proxy statement false or misleading.
Defendants moved to dismiss both plaintiff’s
initial and amended complaints. The district
court granted both motions to dismiss,in part, because plaintiff failed to plead
an actionably false misrepresentation oromission. Plaintiff appealed the dismissal.

Omnicare Standards for Pleading
Falsity of Opinion Via Eithera Misleading Representation
or Omission Apply to Section
14(a) Claims
Beginning its discussion of the applicablestandard, the court explained that Rule
14a-9 prohibits any statement which, underthe circumstances, is false or misleadingwith respect to any material fact, or whichomits to state any material fact necessary
in order to make the statements not false or
misleading. The court further explained that
despite Rule 14a-9’s use of the word “fact” italso permits “a plaintiff to plead and prove
false the ‘statements of reasons, opinions,or beliefs’ of a company’s directors[.]”Quoting Va. Bankshares v. Sandberg, 501
U.S. 1083 (1991). The court then pointed
out that the Ninth Circuit has not addressed
how Omnicare affects claims alleging falsityof an opinion under Rule 14a-9. The court
explained that in Omnicare, “the Supreme
Court examined the standards for alleging
falsity of an opinion under [S]ection 11[.]”The Ninth Circuit then referenced its recent
decision in Wochos v. Tesla, 985 F.3d
1180 (9th Cir. 2021), discussing Omnicare
and summarizing the three ways that “astatement of opinion may nonetheless involvea representation of material fact that, if
that representation is false or misleading,
could be actionable.” Specifically: (1) “every
statement of opinion explicitly affirms one
fact: that the speaker actually holds thestated belief”; (2) “some sentences thatbegin with opinion words like ‘I believe’contain embedded statements of fact”; and(3) “a reasonable investor may, dependingon the circumstances, understand an
opinion statement to convey facts about how
the speaker has formed the opinion—or,
otherwise put, about the speaker’s basis forholding that view.” Citing Wochos, the court
explained that “[s]uch a statement could
potentially give rise to liability under anomission theory if the facts conveyed in thatfashion are untrue, as would be apparent
based on a more fulsome disclosure.”

The court observed that “the district court
hesitated to extend Omnicare’s discussionof how omissions can render a statementof opinion false or misleading to the Rule
14a-9 context without our explicit approval.”
Providing such approval, the court statedthat “we hold that Omnicare’s standards
for pleading falsity of opinion—via either
a misleading representation or omission—
apply to claims arising under [S]ection 14(a),as implemented by Rule 14a-9.” The court
concluded “that Omnicare’s elucidationof what ‘facts’ a statement of opinion may
convey and the possibility and manner ofproving those ‘facts’ false or misleading
through an omission theory applies to theRule 14a-9 context.”
The Ninth Circuit summarily dealt
with plaintiff’s allegations in a separate
unpublished memorandum concluding that,with respect to the alleged misrepresentations
and omissions in connection with statementsof opinion, plaintiff failed to allege falsity or
to overcome the PSLRA’s safe harbor. Golub
v. Gigamon, No. 19-16975, 2021 WL 1554439(9th Cir. 2021).

Ninth Circuit: Joins Other
Circuits in Holding That
Reliance on General Economic
Principles Without More Is
Not Enough to Plead a Dutyof-Prudence Violation Under
Fifth ThirdOn April 19, 2021, the Ninth Circuit affirmed
the dismissal of a putative class action
alleging that an employee stock ownershipplan (“ESOP”) fiduciary breached his dutyof prudence because he knew that thecompany’s stock price was artificially inflated
by undisclosed information concerning
the company’s ex parte communications
with regulators, yet he failed to disclose
the information promptly, which would
have allowed the company’s stock price tocorrect and mitigate the harm to the plan
participants. Wilson v. Craver, 2021 WL
1523253 (9th Cir. 2021) (Murguia, J.). The
court held that plaintiff failed to state a claim
for breach of the duty of prudence consistent
with the standard announced in Fifth Third
Bancorp v. Dudenhoeffer, 573 U.S. 409
2

(2014), because plaintiff offered no contextspecific allegations explaining why an earlier
disclosure would be so clearly beneficial thata prudent fiduciary could not conclude that it
would be more likely to harm the fund than tohelp it. The court further held that relying on
general economic principles (that the longer
a fraud is concealed, the greater the harm tothe company’s reputation and stock price),
without more, was not enough to plead aduty-of-prudence violation, agreeing with theSecond, Fifth, Sixth and Eighth Circuits.

The Court Sets Forth the Fifth Third
Pleading Standard
The court stated that the “sole issue on appeal
is whether [p]laintiff plausibly alleged aduty-of-prudence claim under the pleading
standard announced in Fifth Third[.]” To
allege a duty-of-prudence claim against an
ESOP fiduciary under the Fifth Third pleading
standard, “a plaintiff must plausibly allege analternative action that the defendant could
have taken that would have been consistent
with the securities laws and that a prudent
fiduciary in the same circumstances would
not have viewed as more likely to harm thefund than to help it.” Referring to Fifth Third,
the court explained that this is a contextspecific inquiry, focused on the circumstancesprevailing at the time that the fiduciary acts.

Plaintiff Claimed the District Court
Applied an Impossible Standard
On appeal, plaintiff asserted that the district
court applied an “impossible standard” andheld that plaintiff “failed to state a duty-ofprudence claim solely because the proposed
alternative—a corrective disclosure—would
have caused a drop in [the company’s] stock
price.” However, the Ninth Circuit statedthat plaintiff “mischaracterizes the district
court’s order[]” and clarified that the district
court “concluded that [p]laintiff’s [second

amended complaint] failed to include contextspecific allegations plausibly explaining why
a prudent fiduciary in [d]efendants’ position‘could not have concluded’ that a corrective
disclosure would do more harm than goodto the Stock Fund.” The court summarized
plaintiff’s theory to be that no reasonablefiduciary could conclude that disclosing
the truth would do more harm than good
because “‘the longer that corrective disclosure
was delayed, the greater the negative priceimpact would be once disclosure finallyoccurred[]’” and that “‘the longer [the] fraud
went on, the more damage would be done
to [the company’s] reputation when thetruth emerged.’”Generic Economic Principles
Not Enough to Plead Duty-ofPrudence Violations
Citing decisions from the Second, Fifth,
Sixth and Eighth Circuits, the court observedthat “nearly every court to consider dutyof-prudence claims post Fifth-Third has
rejected the notion that general economic
principles, such as those [p]laintiff relied on,
are enough on their own to plead duty-ofprudence violations.” The court pointed outthat this “consensus is consistent with Fifth
Third’s call for context-specific allegations
and the Supreme Court’s stated intent toprovide some protection from meritless
claims.” The court held that “we join oursister circuits in concluding that the recitationof generic economic principles, without more,is not enough to plead a duty-of-prudence
violation.” The court further held that “wheregeneral economic principles are alleged,
the complaint must also include contextspecific allegations explaining why an earlier
disclosure was so clearly beneficial that a
prudent fiduciary could not conclude that it
would be more likely to harm the fund thanhelp it.” The court concluded that the “district
court did not err in requiring the same.”3Northern District of Illinois:
Items 105 and 303 Impose a
Duty to Disclose an Alleged
Years-Long Bribery Scheme as
Regulatory Noncompliance
On April 21, 2021, the Northern Districtof Illinois denied dismissal of a putative
securities fraud class action that allegedthat an electric company, its subsidiary andcertain executives made false and misleadingstatements and omissions that concealed aneight-year scheme to bribe state lawmakers
to pass favorable legislation. Flynn v. Exelon,
2021 WL 1561712 (N.D. Ill. 2021) (Kendall, J.).
While recognizing that the Seventh Circuit has
not held that Items 105 and 303 of Regulation
S-K impose a duty to disclose any regulatory
noncompliance, the court held that plaintiff
sufficiently alleged that defendants had a duty
to disclose their alleged bribery scheme underItems 105 and 303 and failed to do so.

Disclosure Requirements Under
Items 105 and 303
Defendants argued that they were not undera general duty to disclose, whereas plaintiff
argued that Items 105 and 303 of SEC
Regulation S-K impose a duty to disclose
any regulatory noncompliance. The court
stated that “Item 303, which sets forthdisclosure requirements for Forms 8-K and
10-Q, requires disclosure of ‘any known
trends or uncertainties that have had or thatthe registrant reasonably expects will havea material favorable or unfavorable impact
on net sales or revenues or income fromcontinuing operations.’” Citing the regulation,
the court also explained that ‘“Item 105
requires disclosure of the most significant
factors that make an investment in theregistrant or offering speculative or risky.”’

disclose their alleged bribery scheme underItems 105 and 303 and that they failed to
do so.”
The court pointed out that plaintiff specificallyalleged how defendants plausibly had a duty
to disclose under Items 105 and 305. With
respect to Item 105, plaintiff alleged that thecompany’s 2018 Form 10-K and Forms 10-Q
for the first two quarters of 2019 “failed to
discuss the following significant factors thatmade investment in [the company] risky:that [the company] and [the subsidiary] faced
substantial risk of criminal penalties, andsubstantial risk that proposed and futurefavorable legislation would be compromised,
due to the [c]ompany’s changed strategy fromlegal lobbying to an eight-year illegal andundisclosed bribery scheme[.]”With respect to Item 303, plaintiff allegedthat the same SEC forms “failed to disclosematerial trends, events, and uncertainties
known to management that were reasonably
expected to have a material adverse effecton the [c]ompany’s resources and resultsof operations, namely that: the [c]ompany
faced substantial risk of criminal penalties
due to the [c]ompany’s changed strategy
from legal lobbying to an eight-year illegal
and undisclosed bribery scheme[.]” As tothis topic, the court concluded that plaintiff“sufficiently alleged that [d]efendants had aduty to disclose their alleged bribery scheme
under Items 105 and 303 and that they failed
to do so.”

Defendants Had a Duty to Disclose
Their Alleged Bribery Scheme
Under Items 105 and 303
The court observed that although the Seventh
Circuit has yet to rule on the issue, a lineof recent Northern District of Illinois cases
have held that Items 105 and 303 of SEC
Regulation S-K impose a duty to disclose any
regulatory noncompliance in its SEC forms.
The court then held that plaintiff “sufficiently
alleged that [d]efendants had a duty to4Southern District of Texas:
Denies Dismissal of Class
Action Alleging Defendants
Made Misrepresentations to
Obtain Shareholder Approval
for a De-SPAC Transaction
On April 14, 2021, the Southern District ofTexas denied the dismissal of a securities
fraud class action alleging that defendants
made a series of misrepresentations to induce
plaintiff investors to vote for a de-SPAC
transaction. Camelot Event Driven Fundv. Alta Mesa Res., 2021 WL 1416025 (S.D.
Tex. 2021) (Hanks, J.). The court held thatplaintiffs pled sufficient facts to establish
claims under Sections 10(b), 14(a) and 20(a)where the company formed by the SPAC
disclosed a $3.1 billion write-down lessthan one year after its first 10-K was filed.
Notably, the court denied the dismissal as
to all defendants, including executives anddirectors of the post-merger company, two
executives at the SPAC that became the postmerger company, and four business entities,
including the SPAC sponsor, which were
alleged to be control entities.

Plaintiffs’ Allegations
Plaintiffs alleged that, prior to the merger,
defendants intentionally overstated the valueof the assets that were acquired in the merger.
Plaintiffs alleged that defendants used
misleading reserve and financial projections
to overstate the value of the target companies
to secure the SPAC shareholders’ approval ofthe merger.

The Court’s Findings
After a lengthy recitation of the events
following the merger, the court found that thecompany’s SEC filings and other disclosures“indisputably show that [the company]
experienced a massive drop in value during
its brief time on the NASDAQ, to the point
where the company wrote down over 80% of
its market value after its first year in existence
and where assets valued at $3.8 billion at
the time of the special purpose acquisition
company merger sold for, at most, $320
million in a bankruptcy proceeding two
years afterward.” The court found that it was“also indisputable that, toward the end of its
short lifespan, [the company] acknowledged
serious, systemic deficiencies in its financial
reporting that created a reasonable possibility
that a material misstatement of the company’s
annual or interim financial statements would
not have been prevented or detected on atimely basis.” Additionally, these reporting
deficiencies triggered an ongoing SEC
investigation.

Sufficient Facts Pled to Establish
Claims Under Sections 10(b), 14(a)and 20(a)Background
After its IPO in March 2017, the SPAC in thiscase identified two oil-and-gas companies,
an upstream company and a midstream
company, for acquisition. The target
companies, though nominally separate, were“deeply intertwined” with overlapping owners
and interconnected operations. The SPAC’s
stockholders voted to approve the merger in
February 2018 and the merger closed.

The court stated that plaintiffs have “detailed
numerous statements by various defendants
from SEC filings, press releases, conferences,and earnings calls[,]” and determined that the“circumstances surrounding the company’s
financial reporting . . . are alone enough toentitle [p]laintiffs to discovery.” In supportof holding that plaintiffs pled sufficient facts
to establish a Section 10(b) claim, the court
noted that the 12 executive and director
defendants all signed its first 10-K, which was
filed less than two months after the SPAC
merger closed. The court observed that lessthan a year after that 10-K was filed, thecompany disclosed a $3.1 billion dollar writedown and that it was unable to file its annual
report on time because it expected to report5material weakness in its internal control overfinancial reporting in the 2018 Form 10-K.
The company also “confirmed that it expected
to report a net loss of $3.1 billion for the year
ended December 31, 2018 because of thewrite-down.” The court held that “[u]nder thecircumstances, the enormity of the writedown over such a short period of time isenough for the case against these defendants
to proceed.” The court further determinedthat plaintiffs “have pled facts sufficient toshow that the defendants who signed the
March 29, 2018 10-K acted with the requisite
severe recklessness under Section 10(b). The
same circumstances also satisfy the pleading

standard for claims related to the [p]roxy
under Section 14(a)[.]”
Further, the court concluded that plaintiffs
pled sufficient facts to establish a claim
under Section 20(a), where plaintiffs alleged“a complex web of securities ownership,
contracts, business relationships, interlocking
directors, and other factors that satisfies
the ‘relaxed and lenient pleading standard
for evaluating whether a plaintiff has
sufficiently alleged a claim for control person
liability.’” Quoting One Longhorn Land I,
L.P. v. Defendant FF Arabian, LLC, 2015 WL
7432360 (E.D. Tex. 2015).

This edition of the
Securities Law Alert was edited by
Meaghan A. Kelly / +1-202-636-5542
mkelly@stblaw.com
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cscarboro@stblaw.com
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gwang@stblaw.com

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