Securities Law Alert
In This Edition:• Supreme Court: Grants Certiorari to Consider Whether the American Pipe Tolling Doctrine Permits an
Unnamed Class Member to File a New Class Action After the Expiration of the Applicable Limitations
Period• Supreme Court: Hears Oral Arguments on (1) Whether State Courts Have Jurisdiction Over Class Actions
Alleging Only ‘33 Act Claims; and (2) Who Qualifies as a “Whistleblower” Under the Dodd-Frank Act’s
Anti-Retaliation Provisions• Second Circuit: (1) Affiliated Ute Presumption of Reliance Does Not Apply If Plaintiffs’ Claims Are“Primarily Based on Misstatements,” and (2) Plaintiffs May Be Able to Establish Market Efficiency
Without Direct Evidence of Price Impact• Fourth Circuit: Allegations Sufficient to Raise an Inference of the Speaker’s Knowledge of a Statement’s
Falsity Do Not, Standing Alone, Satisfy the Scienter Pleading Requirement• Ninth Circuit: Plaintiffs Cannot Plead Loss Causation Based Solely on the Disclosure of Customer
Complaints of Possible Fraud• Northern District of Texas: Predominance Requirement for Class Certification Is Not Satisfied Where
Putative Class Members Relied on “Varying” Representations
November/December 2017

Simpson Thacher
has a “[d]eep bench oftrial and appellate lawyers
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securities class actions andderivative suits.”–Chambers USA 2017

Supreme Court: Grants
Certiorari to Consider
Whether the American Pipe
Tolling Doctrine Permits
an Unnamed Class Member
to File a New Class Action
After the Expiration of the
Applicable Limitations Period
On December 8, 2017, the Supreme Court
granted certiorari to decide whether the
tolling rule established in American Pipe &Construction Co. v. Utah, 414 U.S. 538 (1974)

Simpson Thacher & Bartlett LLP

allows an unnamed class member to file a newclass action after the applicable limitations
period has expired. China Agritech v. Resh,
No. 17-432. The American Pipe Court heldthat “the commencement of a class actionsuspends the applicable statute of limitations
as to all asserted members of the class who
would have been parties had the suit been
permitted to continue as a class action.”
The Supreme Court subsequently held, in
Crown, Cork & Seal Co. v. Parker, 462 U.S.
345 (1983), that the American Pipe tolling
doctrine applies not only to intervenors but
also to class members who file individual
actions.

In Resh v. China Agritech, 857 F.3d 994(9th Cir. 2017), the Ninth Circuit held that
the American Pipe tolling doctrine permits
plaintiffs to bring a new class action after
the expiration of the statute of limitations if
they were unnamed plaintiffs in a timely-filed
putative class action, even if class certification
was denied in the prior action on substantive
grounds and the new action asserts similarclass claims.
The Ninth Circuit found that “permitting
future class action named plaintiffs, whowere unnamed class members in previously
uncertified classes, to avail themselves ofAmerican Pipe tolling would advance thepolicy objectives that led the Supreme Court
to permit tolling in the first place.” The Ninth
Circuit reasoned that this “rule creates nounfair surprise to defendants because thependency of a prior class suit has alreadyalerted them ‘not only [to] the substantive
claims being brought against them, but also[to] the number and generic identities ofthe potential plaintiffs who may participate
in the judgment.’” Id. (quoting American
Pipe, 414 U.S. 538). As to the possibility
that this rule might “lead to abusive filing ofrepetitive class actions,” the Ninth Circuit
stated that “ordinary principles of preclusionand comity will … reduce incentives to
re-litigate frivolous or already dismissed classclaims, and will provide a ready basis for
successor federal district courts to deny classaction certification.”
The Ninth Circuit’s decision is in line withthe approach taken by the Sixth and Seventh
Circuits.1 However, in Korwek v. Hunt,
1. Sawyer v. Atlas Heating & Sheet Metal Works, 64 2 F.3d 560(7th Cir. 2011) (holding that whether or not a class member canbring a subsequent class action does not depend on “the statuteof limitations or the effects of tolling, but the preclusive effects ofa judicial decision in the initial suit applying the criteria of Rule23”); Phipps v. Wal-Mart Stores, 792 F.3d 637 (6th Cir. 2015)(“subsequent class actions timely filed under American Pipe are
not barred”).

827 F.2d 874 (2d Cir. 1987), the Second
Circuit expressly held that American Pipe
“does not apply to permit a plaintiff to file asubsequent class action following a definitive
determination of the inappropriateness ofclass certification.” The First, Fifth, andEleventh Circuits have held that American
Pipe only tolls the individual claims of absent
class members, and does not permit absent
class members to bring a class action after
the expiration of the statute of limitations.2
The Third and Eighth Circuits have held thata class member may file a subsequent classaction only if class certification was denied forreasons unrelated to the validity of the classitself.3
The Supreme Court granted defendant’s
petition for a writ of certiorari to review
the Ninth Circuit’s decision in China
Agritech to address the question of whether
American Pipe tolls the class claims of
unnamed class members, in addition to theirindividual claims.

2. See Basch v. Ground Round, 139 F.3d 6 (1st Cir. 1998)(“Plaintiffs may not stack one class action on top of another andcontinue to toll the statute of limitations indefinitely. … This
simply cannot be what the American Pipe rule was intended
to allow, and we decline to embrace such an extension of that
rule.”); Salazar-Calderon v. Presidio Valley Farmers Ass’n,
765 F.2d 1334 (5th Cir. 1985) (“Plaintiffs have no authority for
their contention that putative class members may piggyback oneclass action onto another and thus toll the statute of limitationsindefinitely, nor have we found any.”); Griffin v. Singletary, 17
F.3d 356 (11th Cir. 1994) (“the pendency of a previously filed classaction does not toll the limitations period for additional classactions by putative members of the original asserted class”).
3. Yang v. Odom, 392 F.3d 97 (3d Cir. 2004) (“where classcertification has been denied solely on the basis of the leadplaintiffs’ deficiencies as class representatives, and not becauseof the suitability of the claims for class treatment, American
Pipe tolling applies to subsequent class actions”); Great Plains
Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986 (8th Cir. 2007)(following Yang and explaining that “[w]hether the American
Pipe rule applies to subsequent class actions … depends on thereasons for the denial of certification of the predecessor action”).

2Supreme Court: Hears Oral
Arguments on (1) Whether
State Courts Have Jurisdiction
Over Class Actions Alleging
Only ’33 Act Claims; and(2) Who Qualifies as a
“Whistleblower” Under the
Dodd-Frank Act’s AntiRetaliation Provisions
On November 28, 2017, the Supreme Court
heard oral arguments in two significant
securities law cases: Cyan v. Beaver County
Employees Retirement Fund, No. 15-1439,
in which the Court will decide whether aclass action alleging only violations of the
Securities Act of 1933 (“the ’33 Act”) may bebrought in state court; and Digital Realty
Trust v. Somers, No. 16-1276, in which the
Court will determine whether the Dodd-Frank
Wall Street Reform and Consumer Protection
Act’s (“Dodd-Frank Act”) anti-retaliation
protections apply to an employee who makes
internal disclosures of allegedly wrongfulactivity, but does not report the activity to
the SEC.

Justices Question Whether
SLUSA Divested State Courts ofJurisdiction Over Class Actions
Alleging Only ’33 Act Claims
After the Private Securities Litigation
Reform Act of 1995 (“PSLRA”) imposedheightened pleading requirements for federal
securities fraud class actions, plaintiffs
began filing securities fraud class actions
in state courts asserting violations of statelaw. Congress responded by enacting the
Securities Litigation Uniform Standards
Act of 1998 (“SLUSA”), which provides that“[n]o covered class action based upon thestatutory or common law of any state … may
be maintained in any State or Federal court byany private party alleging” securities fraud. 15
U.S.C. § 77p(b). SLUSA further provides that“[a]ny covered class action brought in any
State court involving a covered security, as set
forth in subsection (b), shall be removable toFederal district court.” 15 U.S.C. § 77p(c).
Prior to SLUSA’s enactment, federal andstate courts had concurrent jurisdiction overactions asserting ’33 Act claims pursuant to

15 U.S.C. § 77v(a). SLUSA amended Section
77v(a) to add the italicized language: “Thedistrict courts of the United States … shallhave jurisdiction … concurrent with Stateand Territorial courts, except as provided
in [S]ection 77p of this title with respect tocovered class actions.” SLUSA also amended§ 77v(a)’s removal bar as follows: “Except
as provided in [S]ection 77p(c) of this title,
no case arising under” the Securities Act of1933 “shall be removed to any court of theUnited States.”
At issue in Cyan is whether Congress
intended to divest state courts of jurisdiction
over all class actions brought under the ’33
Act. Lower courts are deeply divided on theissue. Some fifty-five federal court decisions
have taken divergent positions on whether
state courts have subject matter jurisdiction
over ’33 Act claims in the aftermath of
SLUSA. In general, federal district courts in
California have held that state courts retain
jurisdiction over ’33 Act claims, while many
courts outside of California have held that
SLUSA eliminated state court jurisdiction
over such actions.
The oral argument focused heavily on theproper reading of § 77v(a). Cyan argued thatthe text, structure, and purpose of SLUSA
reveal Congress’s intent to divest state
courts of jurisdiction over class action cases
alleging ’33 Act claims. Under this reading,
SLUSA should be read to provide exclusive
jurisdiction to federal courts over ’33 Act
class actions, bringing it into line with thetreatment of claims asserted under the
Securities and Exchange Act of 1934 (“the’34 Act”). To Cyan, the natural reading of thestatute demonstrates that Congress intended
to amend the ’33 Act in order to curtail theefforts to evade the dictates of the PSLRA.
Cyan also argued that SLUSA’s legislative
history reflected Congress’s intent to makefederal court the “exclusive” and “only” venue
for hearing federal securities class actions.
The United States, participating as amicus
curiae, argued for a more limited reading
than Cyan, but one that would nonethelessallow state court suits asserting exclusively’33 Act claims to be removed to federal
court. According to the Solicitor General,nothing in SLUSA prevents state courts
from maintaining concurrent jurisdiction
over covered class actions that only allege’33 Act claims. The Solicitor General argued,3

however, that § 77p(c) permits the removalof “[a]ny covered class action brought in any
State court involving a covered security, as
set forth in subsection(b).” Therefore, thegovernment took the position that thoughstate courts retain concurrent jurisdiction
to hear covered class actions that allege only
violations of the ’33 Act, such cases may
nevertheless be removed to federal court if the
defendant so chooses.

several minutes of Cyan’s argument, Justice
Sotomayor questioned whether SLUSA’s
purpose was to divest state courts ofjurisdiction over all ’33 Act claims, as opposed
to only removing its jurisdiction over claims
asserting both ’33 Act and state law claims.
Justice Sotomayor also appeared to reject
the contention that it was necessary to keep
all ’33 Act claims in federal court in order toapply a uniform set of standards for thosecases. Justices Kagan and Ginsberg appeared
to agree with Justice Sotomayor’s position.
By contrast, Justice Gorsuch pressed
Respondent to explain why, if the language
was so carefully drawn, Respondent’s position
would treat one of the “except” clauses in§ 77v(a) as superfluous.
Justice Alito began his questioning byreferring to the statute as “gibberish.”
However, he then appeared to take issue
with the interpretations being proposed by
all sides.

Respondent investors argued that SLUSA
was intended to prohibit the filing of certain
securities class actions under state securities
laws, not to prohibit the litigation of ’33 Act
claims in state court. Respondent further
argued that the provisions of SLUSA limiting
state court jurisdiction and allowing removal
apply only to cases asserting both state
law claims and ’33 Act claims, not to those
asserting exclusively ’33 Act claims. In otherwords, Respondent argued that SLUSA waswritten to root out the most abusive practicesof securities class actions, not to prevent
state courts from hearing these cases at all.
Respondent pointed out that Congress could
have clearly and easily eliminated concurrent
jurisdiction for ’33 Act claims had it wished
to do so. Because the language of SLUSA does
not contain such clear language and instead is
far more limited, Respondent argued, SLUSA
clearly provided that state courts should
retain concurrent jurisdiction for class actions
brought exclusively under the ’33 Act.
The one conclusion that the Justices appeared
to reach was that the relevant language in
SLUSA was far from clear. Indeed, Justices
described Congress’s language as “obtuse”
and “gibberish.”
Other than agreeing that SLUSA’s language
was unclear, the Court appeared to offer
divergent views on how to construe thelanguage in question. Within the first

Finally, Justice Breyer appeared intrigued by
the Solicitor General’s position that Congress
did not deprive state courts of concurrent
jurisdiction over suits asserting only ’33 Act
claims, but provided for the removal of thoseclaims to federal court.

Justices Consider Whether the
SEC’s Definition of “Whistleblower”
Should Govern the Reach of
the Dodd-Frank Act’s AntiRetaliation Provisions
Section 922 of Dodd-Frank, codified as
Section 21F of the Securities Exchange Act of1934, created new rewards and employment
protections for individuals who report
alleged violations of the securities laws.
Section 21F(a) defines a whistleblower as“any individual who provides … information
relating to a violation of the securities laws
to the Commission, in a manner established,by rule or regulation, by the Commission.” 15
U.S.C. 78u-6(a)(6) (emphasis added). Section
21F’s anti-retaliation provision goes on toprohibit employers from firing or penalizing
employees who, among other things, “mak[e]disclosures that are required or protectedunder the Sarbanes-Oxley Act of 2002.” Incertain situations, Sarbanes-Oxley requires
internal reporting before external reporting(e.g., auditors must inform management ofany potentially illegal acts and may only bring4

their concerns to the SEC after this internalreporting has occurred). In 2011, the SEC
promulgated a rule construing Section 21F,
which interpreted the term “whistleblower”
to include employees who make only internal
disclosures of potentially wrongful activity.

protections superfluous with the enactmentof Dodd-Frank. Citing the “elephant-in-amousehole” doctrine, Digital Realty argued
that Congress would not have intended tocreate an “all-purpose anti-retaliation” regime
through the use of ancillary provisions.

The circuits are divided on whether anindividual who reports alleged misconduct
internally but does not report that misconduct
to the SEC qualifies for the Dodd-Frank Act’s
anti-retaliation protections. Compare Asadi
v. G.E. Energy (USA), 720 F.3d 620 (5th Cir.
2013) (holding that the Dodd-Frank Act’s
definition of “whistleblower” “expressly andunambiguously requires that an individual
provide information to the SEC”) with
Berman v. Neo@Ogilvy, 801 F.3d 145 (2dCir. 2015) (finding that the tension between
the two relevant provisions of the DoddFrank Act “creates sufficient ambiguity” torequire the court‘s deference to the definitionof ‘whistleblower’ in the SEC’s implementing
regulations) and Somers v. Digital Realty
Trust, 850 F.3d 1045 (9th Cir. 2017) (holdingthat the Dodd-Frank Act “necessarily bars
retaliation against an employee of a publiccompany who reports violations to the boss”
but not to the SEC.)The United States, participating as amicus
curiae to defend the SEC’s regulatory
definition, disagreed with Digital Realty,
asserting that the statutory definition applied
to Dodd-Frank’s rewards provisions, while theordinary meaning of “whistleblower” applied
to the retaliation provisions. Further, there
is a “unity of interest” among employees,
employers, and the SEC in protecting
and strengthening internal reporting andcompliance.

Oral argument focused primarily on two
issues. First, the Court considered whether
to apply Dodd-Frank’s definition to both
the Act’s rewards and anti-retaliation
provisions, as opposed to just the Act’s
rewards provisions. Second, the Court
evaluated the extent to which it ought to deferto the SEC’s promulgated regulation if thestatutory language is indeed determined tobe ambiguous.

Counsel for Somers emphasized that DoddFrank must be read as being consistent
with the entire securities law framework,
which is designed to respond to the conductof employers rather than the mechanism
through which an employee discloses
potentially wrongful conduct. Finally, Somers’
counsel noted that Dodd-Frank was designed
to strengthen, not contradict, the SarbanesOxley regime, and that adopting Petitioner’s
reading of the statute would frustrate
this purpose.

Which Definition of “Whistleblower” Applies?

Digital Realty contended that the statutory
definition applied, “by its plain terms,” tothe entirety of Dodd-Frank’s whistleblower
provisions. This reading, counsel for thecompany claimed, is “entirely consistent” with
Congress’s intent to increase the incentives
for reporting violations of securities laws to
the SEC. Moreover, the legislative history
supports this view, as an earlier version of
the anti-retaliation provisions “reached all
employees,” but was revised to apply just to“whistleblowers.” Digital Realty noted that the
Sarbanes-Oxley regime offers protections toemployees who only make internal disclosuresof potentially wrongful activity, and that
Congress did not intend to render these

The Justices evaluated the circumstances
under which the Court should or could
depart from Dodd-Frank’s definitionof “whistleblower.” Justice Sotomayor
noted she was “not sure there’s a natural
reading [or ordinary meaning]” of theword “whistleblower.” Justice Gorsuch
exclaimed that he was “just stuck on theplain language” of the text, wondering “howmuch clearer could Congress have been?”
Chief Justice Roberts noted that, even if
Congress inadvertently created an anomalous
situation, the Court could not move beyond
a clearly defined term unless a failure to do5

so would “make[] a mess of the whole thing.”
Justice Breyer questioned if Dodd-Frankcreates an anomaly at all, noting that internal
whistleblowers still get Sarbanes-Oxley
protections. Based on the questions posed,
many of the Justices appeared wary of setting
aside the Dodd-Frank definition based on the
supposedly anomalous situations Somers andthe government described.
How Much Deference Should the SEC’s
Opinion Receive?

The Justices also questioned the parties about
why the SEC’s promulgated rule defining“whistleblower” should be accorded Chevron
deference. Justice Gorsuch, agreeing with
Digital Realty, noted that when seeking
public comment on its proposed rule, the SEC
suggested it would be issuing a rule-making“with respect to whistleblowers who reportto the Commission.” However, the agency’s
final rule suggested, without any explanation,that reporting to the Commission would not
be required for Dodd-Frank’s anti-retaliation
provisions to apply.
Counsel for Somers contended that the
SEC “specifically asked for comments about
whether to broaden or change the definitionof whistleblower for the purposes of theanti-retaliation [provisions].” Respondent
further noted that, in a public comment inresponse to the proposed rule, the Associationof Corporate Counsel noted their assumptionthat Dodd-Frank would also cover internal
whistleblowers. The government added that
under the “logical outgrowth test” adopted by
the Supreme Court, an agency “proposing ‘X’and getting ‘not-X’ is enough to satisfy” therequirements of the test.
However, some of the Justices seemedunconvinced by these arguments. Justice
Breyer suggested that receiving notice that the
SEC will be defining what counts as having

provided information to the Commission“does not put people on notice that [theSEC is] … going to apply [the definition] topeople who don’t provide information to theCommission,” adding “I mean, that’s English,
I would think.” After the government’s logicaloutgrowth assertion, Justice Sotomayor
asked, “Bottom line…how much are you
relying on just Chevron deference here?”
Given the skepticism the Justices expressed,
it is unclear whether a majority of the
Court believes that the SEC’s definition of“whistleblower” should be accorded deferencein this case.

Second Circuit: (1) AffiliatedUte Presumption of Reliance
Does Not Apply If Plaintiffs’
Claims Are “Primarily Basedon Misstatements,” and(2) Plaintiffs May Be Able toEstablish Market Efficiency
Without Direct Evidence ofPrice Impact
On November 6, 2017, the Second Circuit heldthat the presumption of reliance establishedin Affiliated Ute Citizens of Utah v. UnitedStates, 406 U.S. 128 (1972) for omissionbased Section 10(b) claims “does not apply”
if plaintiffs’ claims “are primarily based on
misstatements.” Waggoner v. Barclays, 2017
WL 5077355 (2d Cir. 2017) (Droney, J.).
The court further held that “direct evidenceof price impact is not always necessary todemonstrate market efficiency.” In addition,
the Second Circuit ruled that “defendants
seeking to rebut” the presumption of relianceestablished in Basic v. Levinson, 485 U.S. 224(1988) ”must do so by a preponderance ofthe evidence.”6

Affiliated Ute Presumption of
Reliance Applies Only in Cases That
Primarily Involve Omissions
The Second Circuit explained that AffiliatedUte “allows the element of reliance to bepresumed in cases involving primarily
omissions, rather than affirmative
misstatements, because proving reliance insuch cases is, in many situations, virtually
impossible.” The Second Circuit notedthat it has twice found the Affiliated Ute
presumption inapplicable where “the claimsof fraud at issue were not based primarily onomissions.”
In Wilson v. Comtech Telecommunications
Corp., 648 F.2d 88 (2d Cir. 1981), plaintiff
alleged that sales and earnings projections“became misleading when subsequentcorrective information was not timely
disclosed.” Waggoner, 2017 WL 5077355(discussing Wilson, 648 F.2d 88). The
court found the Affiliated Ute presumption
inapplicable because “the omissions
alone were not the actionable events andproving reliance on them was therefore not‘impossible.’” Id. (discussing Wilson, 648 F.2d
88). The Wilson court reasoned that in “manyinstances, an omission to state a material
fact relates back to an earlier statement,
and … the omission may also be termed amisrepresentation.”
Similarly, in Starr ex rel. Estate of Sampson
v. Georgeson Shareholder, 412 F.3d
103 (2d Cir. 2005), the court found theAffiliated Ute presumption did not apply
to claims concerning defendants’ alleged
failure to correct misstatements. Plaintiffs
contended that defendants’ alleged omissions“exacerbated the misleading nature of theaffirmative misstatements,” but did not basetheir claims “primarily” on omissions.
Relying on its prior holdings in Wilson andStarr, the Second Circuit in Waggoner
found the Affiliated Ute presumption
inapplicable because plaintiffs alleged“numerous affirmative misstatements”
and the claimed omissions were “directly
related” to those misstatements. The Second
Circuit underscored that “[t]he AffiliatedUte presumption does not apply to earlier
misrepresentations made more misleading
by subsequent omissions, or to what has been
described as ‘half-truths,’ nor does it apply
to misstatements whose only omission is thetruth that the statement misrepresents.”

Direct Evidence of Price Impact Is
Not Always Required to Establish
Market Efficiency at the Class
Certification StageTo demonstrate market efficiency, aprerequisite for the Basic presumption ofreliance, plaintiffs’ experts typically rely
on some combination of the five factors set
forth in Cammer v. Bloom, 711 F. Supp.
1264 (D.N.J. 1989) and the three factors
enumerated in Krogman v. Sterritt, 202
F.R.D. 467 (N.D. Tex. 2001). Only one ofthese factors — Cammer 5 — is a direct
measure of market efficiency.
The Second Circuit held that “direct evidenceof price impact under Cammer 5 is not always
necessary to establish market efficiency andinvoke the Basic presumption.” The court
explained that “[t]he Cammer and Krogman
factors are simply tools to help district courts
analyze market efficiency in determining
whether the Basic presumption of relianceapplies in class certification decision-making.”
The court emphasized that these factors “areno more than tools,” and stated that “certain
factors will be more helpful than others inassessing particular securities and particularmarkets for efficiency.”
The Second Circuit made it clear that its
decision should not be read to “imply
that direct evidence of price impact underCammer 5 is never important.” The court
observed that “[d]irect evidence of an efficient
market may be more critical, for example, ina situation in which the other four Cammer
factors (and/or the Krogman factors) areless compelling in showing an efficient
market.” The court noted that in Teamsters
Local 445 Freight Division Pension Fund v.
Bombardier, 546 F.3d 196 (2d Cir. 2008), it
placed great weight on Cammer 5 because“certain of the indirect factors did notdemonstrate market efficiency.” Waggoner,2017 WL 5077355 (discussing Bombardier,
546 F.3d 196).
Here, however, the Second Circuit found the
district court was not obligated to consider
direct evidence of market efficiency underCammer 5 because the remaining four
Cammer factors and the Krogman factors“weighed so clearly in favor of concluding thatthe market … was efficient” that defendants
had not even challenged the expert’s analysisof those factors.

7

Defendants Seeking to Rebut the
Basic Presumption Bear the Burdenof Persuasion to Disprove Reliance
The Second Circuit also held the district
court did not err “by shifting the burdenof persuasion, rather than the burden of
production, to rebut the Basic presumption.”
The court explained that in Halliburton
Co. v. Erica P. John Fund, 134 S. Ct. 2398
(2014) (Halliburton II), the Supreme Court
stated that “any showing that severs thelink between the alleged misrepresentationand either the price received (or paid) by
the plaintiff, or his decision to trade at afair market price, will be sufficient to rebut
the presumption of reliance.” The Second
Circuit found “[t]his Supreme Court guidanceindicates that defendants seeking to rebut the
Basic presumption must demonstrate a lackof price impact by a preponderance of theevidence at the class certification stage.”
The Second Circuit reasoned that “the phrase‘[a]ny showing that severs the link’ aligns
more logically with imposing a burdenof persuasion rather than a burden of
production.” The court found Halliburton
II “requires defendants to do more thanmerely produce evidence that might result ina favorable outcome; they must demonstratethat the misrepresentations did not affectthe stock’s price by a preponderance ofthe evidence.”4
In the case before it, the Second Circuit foundthe district court did not abuse its discretionin holding that defendants had not met theirburden of persuasion. The Second Circuit
explained that “the district court was wellwithin its discretion in concluding that thelack of price movement on the dates of thealleged misrepresentations [did] not rebut
the Basic presumption” because plaintiffs had“proceeded on a price maintenance theory.”
That theory “recognizes ‘that statements thatmerely maintain inflation already extant in acompany’s stock price, but do not add to that
inflation, nonetheless affect a company’s stock

4. The Second Circuit distinguished the Eighth Circuit’s decisionin IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775(8th Cir. 2016). There, the Eighth Circuit found defendants
had successfully rebutted the Basic presumption by presenting“overwhelming evidence” that the alleged misstatements had no
impact on Best Buy’s share price. The Second Circuit explainedthat it did not “read the Eighth Circuit’s decision as being in directconflict with [its] holding” because “the Eighth Circuit’s ruling did
not depend on the standard of proof.” Please click here to readour prior discussion of the Eighth Circuit’s decision.

price.’” Id. (quoting In re Vivendi, 838 F.3d
223 (2d Cir. 2016)).
The Second Circuit further held that
defendants’ burden was not met bydemonstrating the existence of “a contributing
factor to the decline” in the stock price. The
court reasoned that “merely suggesting that
another factor also contributed to an impact
on a security’s price does not establish thatthe fraudulent conduct complained of did notalso impact the price of the security.”

Fourth Circuit: Allegations
Sufficient to Raise an
Inference of the Speaker’s
Knowledge of a Statement’s
Falsity Do Not, Standing
Alone, Satisfy the Scienter
Pleading Requirement
On November 15, 2017, the Fourth Circuit
held that allegations raising an inference ofa CEO’s knowledge of a statement’s falsity
were not “sufficient to show that [the CEO]
acted intentionally or recklessly to deceive,
manipulate, or defraud.“ Maguire Financial
v. PowerSecure Int’l, No. 16-2163 (4th Cir.
2017) (Duncan, J.). The Fourth Circuit
reasoned that “scienter and knowledge withrespect to misrepresentation are distinct
components of the requisite analyticalframework.” The court stated that “[t]oconflate the two … would read the scienter
element out of the analysis in contravention of
the … exacting pleading standard” establishedby the Private Securities Litigation ReformAct (“PSLRA”).
At issue in the case before the Fourth Circuit
was a CEO’s alleged misrepresentationthat the company had obtained a contract“renewal and expansion” when the company
had instead secured a new contract that
allegedly turned out to be less profitable thanthe original contract. The Fourth Circuitrecognized that “[a] reasonable investor
might well expect a seasoned executive
like [the company’s CEO] to know thedifference between a contract renewal” anda new contract, “and intend to make thedistinction.” However, the court explainedthat “the reasonable investor’s view of afactual statement” is relevant to the “material8misrepresentation inquiry,” rather than thescienter inquiry.

v. Immersion, Corp., 762 F.3d 880 (9th Cir.
2014)).6

The Fourth Circuit determined that it
could not “infer” scienter from allegations
suggesting that the CEO “knew his statement
was false.” The court found plaintiffs wereattempting to “fuse[ ] an inference that[the CEO] knew enough to realize that his
characterization was technically incorrectwith an inference that he intended todeceive.” The court stated that “stacking
inference upon inference in this manner
violates the [PSLRA’s] mandate that thestrong inference of scienter be supported byfacts, not other inferences.”

The Ninth Circuit noted that it previously
held in Loos “that the mere announcementof an investigation was insufficient toestablish loss causation because it does not‘reveal’ fraudulent practices to the market.”Id. (quoting Loos., 762 F.3d 880). Here,plaintiffs attempted to “rely on even less”
because they cited only to the disclosure ofcustomer complaints “without a subsequent
investigation.” The Ninth Circuit held that“the element of loss causation cannot beadequately made out merely by resting on anumber of customer complaints and assertingthat where there is smoke, there must be fire.”

Here, the Fourth Circuit declined “tofind intent to deceive investors” based on
the CEO’s onetime use of the “possibly
ambiguous” word “renewal” to describe “anagreement that had historically accounted
for approximately 4.1% of the company’s
annual revenue.” The court reasoned that“[i]f [the CEO] wanted to deceive investors,[one] would expect that he would discuss the
new contract at length, in greater detail, or
multiple times, not that he would briefly andambiguously characterize it as a ‘renewal andexpansion’ once.”

Northern District of Texas:
Ninth Circuit: Plaintiffs
Predominance Requirement
Cannot Plead Loss Causation
for Class Certification Is Not
Based Solely on the Disclosure Satisfied Where Putative Classof Customer Complaints ofMembers Relied on “Varying”
Possible Fraud
Representations
On November 21, 2017, the Ninth Circuit
held that a government agency’s disclosureof consumer complaints of possible fraud“did not form a sufficient basis for a viable
loss causation theory.” Curry v. Yelp, 2017
WL 5583889 (9th Cir. 2017) (Gould, J.).5
The Ninth Circuit explained that “[a]lthougha securities fraud plaintiff need not allege
an outright admission of fraud to survive
a motion to dismiss, ‘the mere ‘risk’ or‘potential’ for fraud is insufficient toestablish loss causation.’” Id. (quoting Loos
5. The Ninth Circuit stated that in order “to prove loss causation,
the plaintiff must demonstrate a causal connection between the
deceptive acts that form the basis for the claim of securities fraud
and the injury suffered by the plaintiff” (quoting Ambassador
Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017 (9th Cir. 1999)).

On November 7, 2017, the Northern
District of Texas denied plaintiffs’ motion
for class certification in an action related
to R. Allen Stanford’s Ponzi scheme.
Rotstain v. Trustmark National Bank, No.
3:09-CV-2384-N (N.D. Tex. 2017) (Godbey,J.).7 The court found the Rule 23(b)(3)predominance requirement was not satisfied
because the “investors had different
financial advisors who made varying oral
representations in separate sales pitches forthe” Stanford International Bank Limited(“SIBL”) certificates of deposit (“CDs”) at
issue. The court reasoned that even if it
6. Please click here to read our prior discussion of the Ninth
Circuit’s decision in Loos.
7. Simpson Thacher represents The Toronto-Dominion Bank inthis matter.
9

assumed that “every class member’s claim ispredicated on the sole, common omission that
SIBL was a Ponzi scheme, this omission wasmade in a variety of differing contexts.”
The Northern District of Texas foundinstructive the Fifth Circuit’s decision in
Simon v. Merrill Lynch, Pierce, Fenner& Smith, 482 F.2d 880 (5th Cir. 1973).
There, the Fifth Circuit affirmed the district
court’s denial of class certification based onplaintiff’s “failure to prove any standardized
representations” by the defendant. The
Fifth Circuit reasoned that “[i]f there is any
material variation in the representations
made or in the degrees of reliance thereupon,a fraud case may be unsuited for treatment
as a class action.” The Fifth Circuit also
found it significant that plaintiff “premised
his reliance on the oral touting” of a security
rather than a written statement. The Fifth
Circuit explained that “courts usually holdthat an action based substantially, as here, on

oral rather than written misrepresentations
cannot be maintained as a class action.”
The Northern District of Texas also relied on
its prior decision in Gyarmathy & Associates
v. TIG Insurance Co., 2003 WL 21339279(N.D. Tex. June 3, 2003) (Godbey, J.).
There, the court found the predominancerequirement was not satisfied where“potential class members received varying[oral] representations from their brokers” inaddition to written materials that “may havebeen identical.”In the instant action, plaintiffs sought torepresent a class consisting of more than
17,000 investors in SIBL CDs. “Given thevarying oral representations made to” thethousands of putative class members, theNorthern District of Texas concluded thatplaintiffs “failed to carry their burden of
showing that common issues of fact would
predominate, as required by Rule 23(b)(3).”The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

10

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Paul C. Curnin+1-212-455-2519
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Jonathan K. Youngwood+1-212-455-3539
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Linton Mann III+1-212-455-2654
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David Elbaum
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Joseph M. McLaughlin+1-212-455-3242
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Lynn K. Neuner+1-212-455-2696
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michael.osnato@stblaw.com

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

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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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attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
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