Securities Law Alert
In This Edition:• Southern District of New York: Extensive and Reasonably Specific Warnings in Offering Materials
Constituted a Real Warning to Investors• Southern District of New York: Disclosing Some Inexperience Does Not Create a Duty to Disclose All
Inexperience• Eastern District of New York: Dismisses a Class Action Against an Airline Calling the Securities Fraud
Allegations “Speculative”• California State Appellate Court: Upholds and Enforces a Federal Forum Provision Requiring Securities
Act Claims to Be Brought in Federal Court
May 2022

Southern District of New York:
Extensive and ReasonablySpecific Warnings in Offering
Materials Constituted a RealWarning to Investors
SimpsonThacher’s “[d]ominantsecurities litigationgroup . . . is recognized for
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Simpson Thacher & Bartlett LLPOn April 25, 2022, the Southern District of
New York dismissed a putative securities
fraud class action against a China-based,
U.S.-listed technology company and certainof its employees and directors alleging thatthe company’s offering materials contained
false and misleading statements and omitted
material facts in violation of Sections 11 and
15 of the Securities Act. Yaroni v. Pintec
Tech., 2022 WL 1215450 (S.D.N.Y. 2022)(Furman, J.). The court held that plaintiff
failed to allege that the offering materials
contained misrepresentations and omissions
as to the company’s internal controls because
the controls-related warnings were extensive
and reasonably specific, not generic orboilerplate, such that they constituted areal warning to investors. The court further
determined that plaintiff failed to allege

facts suggesting that the company knew orshould have known about the internal control
weaknesses at the time of the IPO.
Within months of the company’s IPO, theprice of its American Depositary Shares(“ADSs”) declined sharply. Subsequently,
the company’s ADS price also fell following
both the delayed filing of its 2018 Annual
Report on Form 20-F and negative company
disclosures. Plaintiff sued claiming that
defendants made material misstatements oromissions in the company’s offering materials
on various subjects,1 including the company’s
internal controls. Plaintiff alleged that thewarnings in the offering materials on “thepotential risk of ineffective internal controls
over financial reporting and the possible
restatement of prior financial statements were
improper because these harms had alreadymaterialized as of the IPO.”
1. Plaintiff claimed that defendants made material
misstatements or omissions concerning: (1) the company’s
internal controls, its audit committee, and auditor; (2) cash
loans made to its former parent company outside the ordinary
course of business; (3) a loan made to another company;(4) the company’s revenue recognition practices; and (5)certain line items in the company’s financial statements.

The court concluded that each claim failed
as a matter of law. As to the internal controls
allegations, the court explained that underIn re ProShares Trust Sec. Litig., 728 F.3d
96 (2d Cir. 2013), “when a registration
statement warns of the exact risk that later
materialized, a section 11 claim will not lie asa matter of law.” The court determined thatthe warnings in the offering materials about
the company’s internal controls constituted
a real warning. The court pointed out that,at the time of the IPO, the company did state
that: (i) it had limited accounting personnel
and warned that management had notcompleted an assessment of the effectivenessof its internal controls; (ii) its auditor had not
audited its internal controls; (iii) a limited
audit identified a material weakness (thecompany lacked sufficient financial reporting
and accounting personnel with appropriate
knowledge of GAAP and SEC reporting
requirements); and (iv) it might identify
additional material weaknesses in the future
and that it might be required to restate its
financial statements.

persuaded that highlighting inexperiencein some areas created a duty to disclose
all inexperience.
The defendant investment company offeredinvestment products mainly consisting of debt
instruments, such as the company’s “Marine
Finance” line of investment products. Thisline of products involved the company loaning
investor funds to a borrower who wouldpurchase a marine vessel to deconstruct
and sell for scrap. Plaintiffs commenced
this action alleging that $90 million in fivevessel deconstruction loans were in default.
Plaintiffs alleged that the company’s Form
ADV disclosed its team’s lack of experiencein some areas but failed to disclose thatits “Marine Finance” team had never been
involved in a marine deconstruction deal.

The court observed that “critically, tothe extent the Complaint alleges that thewarned-of risks had materialized, it does
not allege that [the company] knew orshould have known of that fact at the timeof the IPO.”

Southern District of New York:
Disclosing Some Inexperience
Does Not Create a Duty toDisclose All Inexperience
On May 3, 2022, the Southern District of
New York denied dismissal of all claims in aputative securities fraud class action alleging
that an investment company, its subsidiaries,
and its president/co-founder failed to disclosematerial information about the company’s
investment opportunities in violation ofSection 10(b), among other claims.2 Tecku
v. Yieldstreet, 2022 WL 1322231 (S.D.N.Y.
2022) (Marrero, J.). Notably, while the court
determined that some allegations survived
the motion to dismiss, the court was not
2. In addition to alleging Section 10(b) violations, plaintiffs also
alleged fraudulent inducement, aiding and abetting fraud,
Section 20(a) violations, common law breach of fiduciary duty,
aiding and abetting breach of fiduciary duty, and negligent
misrepresentation.

The court determined that the company’s
alleged inexperience in marine deconstruction
deals was merely information that plaintiffs
would have liked to know and was not an
actionable omission. The court stated that it
was “not persuaded by an argument that if acompany chooses to highlight its inexperiencein some areas, the company has a duty todisclose all its inexperience, theoretically
including inexperience that has no relevanceto the parties’ dispute.” The court explainedthat the undisclosed inexperience did notrender the included statements misleading,pointing out that plaintiffs did not allege thatthe company said these were the only areasof inexperience. The court reasoned that if itconcluded otherwise then companies would
choose not to disclose any inexperience toprotect against needing to disclose all.
By contrast, the court denied dismissal ofplaintiffs’ allegations concerning actions by
the company’s president/co-founder that2

deviated3 from the diligence process promisedin the offering documents for the five postOctober 2018 vessel deconstruction deal
offerings. Plaintiffs argued that defendants
had a duty to update the offering documents
to accurately represent the diligenceprocess, or at least disclose the intervening
events. The court determined that plaintiffs’
allegations created “a strong inference of aduty” to disclose this information to potential
investors because the president/co-founder’sactions rendered the diligence process inthe offering documents misleading or false.
The court stated that even if the offering
document “statements were accurate whenpublished, the intervening events of October
2018 rendered the statements false, requiring
Defendants to at least update investors
that the diligence process differed from theprocess outlined in the document.”

Eastern District of New York:
Dismisses a Class Action
Against an Airline Calling the
Securities Fraud Allegations“Speculative”
On April 12, 2022, the Eastern District of
New York dismissed a putative securities
fraud class action against an airline andcertain of its officers and directors alleging
that they made misleading upbeat statements
in a May 2020 earnings report, and violated
Section 10(b) by failing to disclose certain
auditor findings later disclosed in June. In re
GOL Linhas Aéreas Inteligentes Sec. Litig.,
2022 WL 1093215 (E.D.N.Y. 2022) (Kovner,J.). The court held that plaintiffs “failed toadequately plead that the May 2020 earnings
report contained material misstatements oromissions of fact . . . because they have notadequately pleaded that defendants knew of
the auditor findings at the time of the May
report.”
3. Plaintiffs alleged the president/co-founder deviatedby identifying and vetting a deal on his own for future
investments with one borrower using a short-term
lending model. Plaintiffs alleged that under the company’s
promised diligence process, the company was supposed
to rely on an industry expert to both identify potential
vessel-deconstruction opportunities and vet whether thesetransactions fit into the expert’s lending methodology. Second,the deals that survived the expert’s vetting were supposed toreceive an independent analysis by the company in which a
multi-party credit committee with veto powers would review
the transaction.

In May 2020, the airline issued its earnings
report for Q1 of 2020, which discussed falling
customer demand, plans to cut capacity,
and an expected revenue decline due to thepandemic. However, the report also noted theairline’s experience navigating times of stress,
the airline’s “effective and structured liquidity
management,” and that while reporting a loss
for Q1, the airline still reported a profit for
its loyalty program. Subsequently, in June
2020 the airline disclosed that its auditor had
substantial doubt about the airline’s ability
to continue as a going concern and identified
material weaknesses in its internal control
over financial reporting (“ICFR”). Plaintiffs
alleged that defendants were liable under
Section 10(b) on an omissions theory because
the May 2020 earnings report, with its upbeat
financial statements, did not disclose theauditor’s negative findings that were later
revealed. Plaintiffs contended that defendants
must have known of the findings when theearnings report was issued.
Concluding that plaintiffs failed to adequately
plead an actionable omission, the court
explained that defendants could only be liableon plaintiffs’ theory if they actually knew of
the auditor’s conclusions at the time thatthe earnings report was issued. While thecomplaint asserted that defendants learnedof their auditor’s concerns “at least as earlyas February 2020 and/or no later thanMay 3, 2020,” the court determined, as in
San Leandro Emergency Med. Grp. Profit
Sharing Plan v. Philip Morris, 75 F.3d 801(2d Cir. 1996), that “such an unsupported
general claim is insufficient to survive a
motion to dismiss.” The court pointed outthat plaintiffs did not point to specific internalreports from the auditor advising defendantsof the auditor’s anticipated findings before the
May earnings report, and also failed to specify
who prepared such reports, when they wereprepared, and who reviewed them.
The court also concluded that plaintiffs fell
short of adequately pleading an omissionsbased claim based on circumstantial
evidence. As to the ICFR deficiencies,
plaintiffs argued that the auditors musthave informed defendants about the
deficiencies by May 2020 because of anauditing industry standard requiring auditors
to disclose significant deficiencies andmaterial weaknesses “in a timely manner”
and “prior to the issuance of the auditor’s
3

report.” However, the court concluded thatplaintiffs’ inference rested on little more than
speculation and that an auditing standard
requiring “timely” disclosures did not support
plaintiffs’ inference. The court also found thatplaintiffs failed to support their assertions
that the auditor would have: (i) concentrated
on ICFR at the outset; (ii) finished examining
ICFR early in the audit; or (iii) reachedtentative conclusions, and informed theairline’s audit committee of such tentative
conclusions, by the time of the May 2020
earnings report. Similarly, the court foundthat only speculation supported the allegationthat the auditor reached its going-concern
conclusion by May 2020, rather than reaching
this conclusion in the following month when
the airline disclosed it.

California State Appellate
Court: Upholds and Enforcesa Federal Forum Provision
Requiring Securities Act
Claims to Be Brought inFederal Court
On April 28, 2022, an intermediate California
appellate court unanimously affirmed a lower
court’s dismissal—based on a federal forum
provision (“FFP”)—of a securities fraud classaction against a Delaware corporation. Wongv. Restoration Robotics, 2022 WL 1261423(Cal. App. Ct. 2022) (Miller, J.). Notably,
this is the first appellate decision on theissue outside of Delaware since the Delaware
Supreme Court’s decision upholding the facial
validity of FFPs under Section 102(b)(1) of theDelaware General Corporation Law (“DGCL”)
in Salzberg v. Sciabacucchi, 227 A.D.3d 102(Del. 2020).

Soon after the defendant corporation’s
IPO, the corporation experienced a stock
drop and plaintiff sued in California state
court alleging that defendant’s offering
documents contained materially false
and misleading statements in violation ofSections 11, 12(a)(2), and 15 of the Securities
Act. Defendant moved to dismiss on thebasis of its certificate of incorporation, which
included an FFP stating that Securities Act
claims must be brought in federal court
unless the corporation consents in writing
to an alternative forum. The trial court
declined jurisdiction on the basis of the FFP
and dismissed. On appeal, plaintiff primarilyraised three arguments: (i) the FFP violated
the Securities Act; (ii) the Delaware statutory
scheme permitting the FFP violated theCommerce Clause and the Supremacy Clause;and (iii) the FFP was unenforceable as it was
beyond investors’ reasonable expectations.
As to whether the FFP violated the Securities
Act, the court rejected plaintiff’s argumentthat he had an unwaivable right to have
his Securities Act claims heard in a state
court under the anti-waiver provision ofSection 77n.4 The court reasoned that if the
Exchange Act’s exclusive federal jurisdiction
provision could be overridden by a forum
selection agreement without violatingthat Act’s anti-waiver provision, then the
Securities Act’s concurrent jurisdiction
provision could likewise be overridden by aforum selection agreement without violating
its anti-waiver provision. In support ofthis the court cited Rodriguez de Quijas
v. Shearson/American Express, 490 U.S.
477 (1989), for the principle that the two
statutes should be construed harmoniously
because they are interrelated componentsof the federal regulatory scheme forsecurities transactions.
As to constitutionality, plaintiff argued thatthe corporation’s certificate of incorporation
could not lawfully include an FFP as
Delaware’s statutory scheme violated theCommerce Clause and the Supremacy Clause.
Noting that the presence of state action was
required to bring a Commerce Clause claim,
the court pointed out that generally a private
entity, like the corporation, is not a state
actor except in a few limited circumstances.
4. Stating that “any condition, stipulation, or provision binding
any person acquiring any security to waive compliance withany provision of this subchapter or of the rules and regulationsof the Commission shall be void.”4

Clause, concluding that Section 1155 of the
DGCL “does not reflect any quarrel between
Delaware and federal law over the content
of the [Securities] Act or the extent of theremedies available under the [Securities] Act.
Nor does it discriminate in favor of state law
claims and against similar federal claims.”

The court observed that plaintiff’s challenge
arose from the corporation’s decision as a
Delaware corporation to include an FFP in its
certificate of incorporation, which the court
noted was permitted, but not required or evenencouraged by Delaware law. The court heldthat it could not conclude that there was state
action given plaintiff’s “failure to demonstrate
any precedent for his Commerce Clause claim
and given the reluctance of courts to expand
the state action doctrine[.]” The court also“conclude[d] that Delaware has a legitimate
interest in allowing its corporations to include
FFPs in their certificates of incorporation, andthat any burden on interstate commerce fromthe inclusion of an FFP does not exceed thebenefits provided by the statute.”
Additionally, the court rejected plaintiff’s
argument that Delaware’s statutory scheme
permitting FFPs violated the Supremacy

As to the FFP’s enforceability, the court statedthat under Drulias v. 1st Century Bancshares,
30 Cal.App.5th 696 (2018), a forum selection
clause, like the FFP, “may be enforced unlessthere is a showing that it was outside thereasonable expectations of the weaker oradhering party or that enforcement would
be unduly oppressive or unconscionable.”
The court rejected plaintiff’s argumentthat an investor should not be expected
to pore over a registration statement orotherwise investigate a company’s certificate
of incorporation or expect to be bound by
a novel provision. The court observed that
forum selection clauses have long been in
existence, and just because one is innovative
does not mean that it is unenforceable. The
court further refused to excuse investors fromfamiliarizing themselves with a company’s
disclosures, particularly in a corporation’s
governing documents.
5. Section 115 provides that the certificate of incorporation or
bylaws of a Delaware corporation may require that “internal
corporate claims” be brought exclusively in Delaware state
courts, and may not prohibit the bringing of such claims in
Delaware state courts. “Internal corporate claims” as definedin Section 115, includes claims for which the Delaware
corporate law confers jurisdiction upon the Court of Chancery.

This edition of the
Securities Law Alert was edited by
Meaghan A. Kelly / +1-202-636-5542
mkelly@stblaw.com
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com andGeorge S. Wang / +1-212-455-2228
gwang@stblaw.com

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