Source: https://www.cadwalader.com/resources/clients-friends-memos/2017-year-in-review--securities-litigation-and-regulation
Timestamp: 2019-04-25 01:12:11+00:00

Document:
Statutes of Limitations and Repose: The Supreme Court held that the SEC’s disgorgement remedy is subject to a five-year statute of limitations, and that a pending class action does not toll the three-year statute of repose under the Securities Act of 1933 (the “Securities Act”) for opt-out plaintiffs.
Class Actions: The Second Circuit held that questions regarding whether activity in the U.S. warrants application of the federal securities laws under Morrison may constitute individual issues that defeat the “predominance” requirement for class certification. The Second Circuit also approved the use of indirect evidence of market efficiency in evaluating whether the fraud-on-the-market presumption applies for purposes of certifying a class action asserting a claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The Supreme Court granted certiorari in a case that will require it to decide whether state courts retain concurrent jurisdiction over securities claims covered by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).
Securities Fraud: The Second Circuit confirmed the operative test to determine the materiality of an omission of interim financial information, and also held that national securities exchanges may face liability in private securities litigation. The Ninth Circuit extended the Omnicare test for determining when statements of opinion are actionable to Section 10(b) claims. The United States District Court for the District of Utah held that, in actions brought by the SEC, Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act should be applied to extraterritorial transactions to the extent that the “conduct and effects” test can be satisfied.
Insider Trading: Following the Supreme Court’s decision in Salman v. United States, the Second Circuit held that a gift of insider information may be illegal even if the tipper lacks a meaningfully close relationship with the tippee.
Indemnification: The United States District Court for the Southern District of New York held that public policy prohibits an underwriter from seeking contractual indemnification of settlement costs from an issuer unless the underwriter has demonstrated that it was without fault.
Whistleblower Actions: The Supreme Court granted certiorari to consider whether whistleblowers who report securities law violations to their internal managers, not to the SEC, are entitled to utilize the anti-retaliation protections in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
Securities Regulation and Enforcement: The SEC determined that certain applications of distributed ledger or blockchain technology, such as bitcoin and similar “coins,” can be securities subject to regulation under the federal securities laws. The new leadership focused the SEC’s enforcement priorities on cybersecurity, protecting retail investors, and pursuing individual violators, and attempted to cure doubts about the authority of its Administrative Law Judges. The House of Representatives passed the Financial CHOICE Act, which would require changes to many aspects of SEC enforcement practices.
In Kokesh v. SEC,5 the Supreme Court held that the SEC’s ability to seek disgorgement as a remedy in an enforcement action is subject to a five-year statute of limitations under 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.”6 In 2009, the SEC brought an enforcement action against Charles Kokesh in the United States District Court for the District of New Mexico, alleging that Kokesh misappropriated $34.9 million from two investment firms that he operated. Following a jury verdict in favor of the SEC, the District Court entered a permanent injunction enjoining Kokesh from violating certain provisions of the federal securities laws, imposed a civil penalty, and ordered disgorgement of profits. Although the District Court limited recovery of the civil penalty to funds Kokesh received within five years of the SEC’s filing of its complaint, the Court ordered full disgorgement of $34.9 million in ill-gotten gains, holding that the five-year statute of limitations under 28 U.S.C. § 2462 does not apply to disgorgement because it is not a “civil fine, penalty, or forfeiture.”7 The Tenth Circuit affirmed the District Court’s judgment with respect to disgorgement.
In California Public Employees Retirement System v. ANZ Securities, Inc.,15 the Supreme Court held that the American Pipe doctrine does not toll the three-year statute of repose under Section 13 of the Securities Act.
In 2008, investors brought a putative class action asserting claims under Section 11 of the Securities Act against Lehman Brothers Holdings Inc. in the United States District Court for the Southern District of New York. The plaintiffs alleged that the Lehman Brothers’ registration statement for certain securities offerings contained material misstatements and omissions. California Public Employees Retirement System (“CalPERS”) opted out of a subsequent class settlement and in 2011 filed an individual action against Lehman Brothers in the Northern District of California. Lehman Brothers moved to dismiss the individual action, arguing that the claims were untimely under the three-year statute of repose since the registration statements containing the alleged misstatements were filed in 2007 and 2008. CalPERS countered that the three-year time bar was tolled under American Pipe, in which the Supreme Court ruled that the statute of limitations for individual claims of absent class members may be tolled on equitable grounds while a timely-filed class action is pending.16 The District Court rejected the tolling argument and dismissed CalPERS’ individual action as untimely. The Second Circuit affirmed.
ANZ should incentivize larger stockholders to file individual actions under Section 11 relatively soon after a class action complaint is filed. The impact of ANZ may be limited, however, given that several circuits (including the Second Circuit, Sixth Circuit, and Eleventh Circuit) previously had held that the three-year statute of repose is not tolled under American Pipe.21 For average investors, moreover, the costs of filing individual actions will continue to far outweigh the benefits, muting concerns that ANZ will open the “floodgates” to individual securities fraud actions.
In In re Petrobras Securities Litigation,22 the Second Circuit revisited the “predominance” requirement for certifying a securities class action under Federal Rule of Civil Procedure 23(b)(3).
In City of Providence, v. BATS Global Markets, Inc.,68 the Second Circuit reversed the dismissal of a class action asserting Section 10(b) claims against several national securities exchanges and high-frequency trading firms (“HFTs”), holding that the exchanges did not enjoy absolute immunity from private securities fraud suits.
The plaintiffs, on behalf of a putative class of investors, alleged that the exchanges manipulated market activity by developing products and services that disproportionately benefited and conferred trading advantages on HFTs. The complaint focused on three products and services: proprietary data feeds, co-location services and complex order types. The plaintiffs alleged that ordinary investors could not afford these products and services, which allegedly allowed HFTs to “front-run” ordinary investors by providing HFTs with data earlier than other market participants and facilitating HFT trades faster than trades for ordinary investors. The United States District Court for the Southern District of New York dismissed plaintiffs’ claims, holding that the exchanges were immune from suit, and the plaintiffs failed to state a Section 10(b) claim.
The District Court’s decision, which is on appeal to the Tenth Circuit,81 is the first federal court decision to hold that the Dodd-Frank Act reinstated the conduct and effects test for securities fraud actions brought by the SEC and the Department of Justice.82 If the decision stands, it will likely increase the risk of liability through SEC or DOJ enforcement actions for companies offering securities globally. The District Court noted, however, that “Section 929P(b) is explicitly limited to actions brought by the SEC or the United States. Thus, Morrison would still control in a private cause of action brought under Section 10(b).”83 Therefore, Morrison continues to provide companies offering securities abroad a meaningful basis to support a motion to dismiss (and oppose class certification under the Second Circuit’s Petrobras decision, described above).
In Perry v. Duoyuan Printing, Inc.,95 Judge George Daniels of the United States District Court for the Southern District of New York ruled that an underwriter could not maintain a claim for contractual indemnity arising out of the settlement of a securities action because enforcement would contravene public policy.
Judge Daniels’ ruling has received scant attention from courts and commentators since it was issued in early 2017. If other courts follow its holding, however, it could have significant implications for underwriters, including precluding underwriters from being indemnified in securities settlements (absent a stipulation or adjudication that the underwriter is less at fault than the indemnitor), and potentially increasing underwriter fees. At minimum, Perry should encourage underwriters to enter into global securities settlements, including with settling co-defendants, instead of relying on potentially unenforceable indemnification agreements.
On June 26, 2017, the Supreme Court granted certiorari in Digital Realty Trust, Inc. v. Somers102 to decide whether Dodd-Frank Act’s anti-retaliation provisions apply to whistleblowers who internally “report up” securities violations to senior management rather than “report out” to the SEC. The Supreme Court heard oral argument on November 28, 2017.
In November, the Commission ratified the appointments of the SEC’s Administrative Law Judges (“ALJs”) and directed the ALJs to reconsider the record in all pending decisions.128 The actions were an attempt to resolve ongoing questions concerning the ALJs’ authority in the face of challenges to their legitimacy under the Appointment Clause of the Constitution.
The SEC’s action to ratify its ALJs came in the midst of the Supreme Court’s consideration of a petition for certiorari filed in Lucia.134 In connection with that petition, the U.S. Solicitor General filed a brief agreeing with the petitioner that the Supreme Court should grant certiorari and deem the ALJs to be “Officers of the United States” subject to the Appointments Clause. The petition for certiorari is currently fully briefed and pending the Supreme Court’s decision.
In June, the Financial CHOICE Act (the “Choice Act”)135 passed the House of Representatives and was referred to the Senate Banking Committee, where it remains pending.
1 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Securities Class Action Filings: 2017 Midyear Assessment, https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2017-Midyear-Assessment.
2 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Securities Class Action Filings: 2017 Q3, https://www.cornerstone.com/Publications/Research/Securities-Class-Action-Filings-2017-Q3.
3 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Sec Enforcement Activity: Public Companies and Subsidiaries, https://www.cornerstone.com/Publications/Reports/SEC-Enforcement-Activity-2017-Update.
4 See Hearing Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Nomination of Jay Clayton, S. Hrg. 115-9 (Mar. 23, 2017) (“There should be deterrence at the company level [but] shareholders do bear those costs . . . . I firmly believe that individual accountability drives behavior more than corporate accountability.”).
5 137 S. Ct. 1635, 1638-44.
7 137 S. Ct. at 1643-44.
12 See Gabelli v. SEC, 568 U.S. 442, 454 (2013).
13 Steven R. Peikin, Co-Director, Enforcement Division, “Reflections on the Past, Present, and Future of the SEC’s Enforcement of Foreign Corrupt Practices Act,” https://www.sec.gov/news/speech/speech-peikin-2017-11-09.
14 SEC v. Collyard, 861 F.3d 760, 764 (8th Cir. 2017) (citation omitted).
15 137 S. Ct. 2042, 2049-55 (2017).
16 American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 556 (1974).
17 137 S. Ct. at 2049.
21 See Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013); Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016); Dusek v. JPMorgan Chase & Co., 832 F.3d 1243, 1249 (11th Cir. 2016).
22 862 F.3d 250, 273-78 (2d Cir. 2017).
23 561 U.S. 247 (2010).
24 Petrobras, 862 F.3d 250 at 271(quoting Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1045 (2016)).
27 Petroleo Brasileiro S.A. v. Universities Superanniuation Scheme Ltd., No. 17-664 (U.S.).
28 Petrobras, 862 F.3d at 274.
29 In re Cobalt Int’l Energy, Inc. Sec. Litig., 2017 WL 3620590, at *3 (S.D. Tex. Aug. 23, 2017).
30 485 U.S. 224, 247 (1988).
33 Petrobras, 862 F.3d 250 at 276.
38 134 S. Ct. 2398, 2417 (2014).
39 See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 351-53 (2011); Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432-35 (2013).
40 In the aftermath of Wal-Mart, Comcast, and Halliburton II, district courts have routinely certified investor classes under a fraud-on-the-market theory of reliance. See e.g., Ludlow v. BP, P.L.C., 800 F.3d 674, 683-89 (5th Cir. 2015); Howard v. Liquidity Servs. Inc., 2017 WL 3948454, at *8-31 (D.D.C. Sept. 6, 2017); Strougo v. Barclays PLC, 312 F.R.D. 307, 328-29 (S.D.N.Y. 2016); Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69, 94-99 (S.D.N.Y. 2015); In re Bridgepoint Educ., Inc. Sec. Litig., 2015 WL 224631, at *4-8 (S.D. Cal. Jan. 15, 2015).
42 Brief for Respondents, Cyan, Inc. v. Beaver County Employees Ret. Fund, No. 15-1439, 2017 WL 4602252, at *5 (U.S. Oct. 13, 2017).
43 See e.g., Schwartz v. Concordia Int’l Corp., 255 F. Supp. 3d. 380, 386 (E.D.N.Y. 2017) (collecting cases); Rajasekaran v. CytRx Corp., 2014 WL 4330787, at *5-8 (C.D. Cal. Aug. 21, 2014).
44 Petition for Writ of Certiorari, Cyan, Inc. v. Beaver County Emps.’ Ret. Fund, No. 15-1439, 2016 WL 3040512, at *2 (U.S. May 24, 2016).
45 135 S. Ct. 1318, 1323-29 (2015).
48 856 F.3d 605, 616 (9th Cir. 2017).
49 City of Dearborn Heights Act 345 Police & Fire Ret. Sys.v. Align Tech., Inc., 2013 WL 6441843, at *6 (N.D. Cal. Dec. 9, 2013).
50 Align Tech., Inc., 856 F.3d at 617.
53 Id. at 616 (quoting Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund, 135 S. Ct. 1318, 1332 (2015)).
54 Id. at 617 (citation omitted).
55 See Tongue v. Sanofi, 816 F.3d 199, 211-12 (2d Cir. 2016) (applying Omnicare to securities fraud claims arising under Section 10(b) and Rule 10b-5, in addition to Section 11, without distinguishing among the provisions).
56 Omnicare, 135 S. Ct. at 1332.
57 861 F.3d 31, 36-38 (2d Cir. 2017).
58 DeMaria v. Andersen, 318 F.3d 170, 180 (2d. Cir. 2003) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
59 Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1210 (1st Cir. 1996).
60 861 F.3d at 36-38.
61 Stadnick v. Vivint Solar, Inc., 2015 WL 8492757, at *13 (S.D.N.Y. Dec. 10, 2015).
62 Vivint, 861 F.3d at 37 (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)).
67 Shaw, 82 F.3d at 1210.
68 --- F.3d ---, 2017 WL 6458383, at *2-12 (2d Cir. Dec. 19, 2017).
70 Id. at *8-9 (emphasis in original).
73 Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
74 See, e.g., Scenic Am., Inc. v. Dep’t of Transp., 138 S. Ct. 2 (2017) (“[W]hatever one thinks of [deferring to agency interpretations] in statutory interpretation cases, it seems quite another thing to suggest that the doctrine (or something like it) should displace the traditional rules of contract interpretation too.”) (statement of Gorsuch, J., with whom the Chief Justice and Alito, J. joined); Cuozzo Speed Tech., LLC v. Lee, 136 S. Ct. 2131, 2148 (2016) (“In an appropriate case, this Court should reconsider that fiction of Chevron and its progeny.”) (Thomas, J., concurring).
75 SEC v. Traffic Monsoon, LLC, 245 F. Supp. 3d 1275, 1288-95 (D. Utah 2017).
76 Morrison, 561 U.S. at 273.
77 Traffic Monsoon, 245 F. Supp. 3d at 1294 (quoting § 929P(b), 124 Stat. 1376, 1864–65 (2010)).
81 Traffic Monsoon, LLC, 245 F. Supp. 3d 1275 (D. Utah 2017), appeal docketed, No. 17-4059 (10th Cir. April 17, 2017).
82 Id. at 1292 (reviewing legislative history explaining that the “purpose” of Section 929P(b) “is to make clear that in actions and proceedings brought by the SEC or the Justice Department, the specified provisions of the Securities Act, the Exchange Act and the Investment Advisers Act may have extraterritorial application”) (citation omitted).
83 Id. at 1294 n.10.
84 869 F.3d 58 (2d Cir. 2017).
85 773 F.3d 448, 452-55 (2d Cir. 2014).
86 Id. at 452 (emphasis added).
91 Id. at 69-70 (internal quotation marks omitted).
93 Newman, 773 F.3d at 448.
94 SEC v. Payton, 97 F. Supp. 3d 558, 564 (S.D.N.Y. 2015) (Rakoff, J.) (quoting Newman, 773 F.3d at 453-54).
95 Perry v. Duoyuan Printing, Inc., 232 F. Supp. 3d 589, 593-95 (S.D.N.Y. 2017).
96 Globus v. Law Research Serv., Inc., 418 F.2d 1276 (2d Cir. 1969).
97 Credit Suisse First Boston, LLC v. Intershop Comm’ns AG, 407 F. Supp. 2d 541, 547 (S.D.N.Y. 2006).
98 Perry 232 F. Supp. 3d at 595.
102 850 F.3d 1045, 1051 (9th Cir. 2017), cert. granted, 137 S. Ct. 2300 (U.S. June 26, 2017) (No. 16-1276).
103 15 U.S.C. § 78u-6(a)(6).
104 17 C.F.R. § 240.21F-2(b)(1).
106 Somers, 850 F.3d at 1051.
108 Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155-59 (2d Cir. 2015).
109 Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013).
110 See Steven Kohn, Digital Realty Trust v. Somers May Kill Corporate Compliance, Law 360 (Sept. 21, 2017), https://www.law360.com/articles/964208/digital-realty-trust-v-somers-may-kill-corporate-compliance.
112 SEC Release No. 34-80206 (March 10, 2017), https://www.sec.gov/rules/sro/batsbzx/2017/34-80206.pdf.
114 Report of Investigation Pursuant to Section 21(A) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (July 25, 2017), https://www.sec.gov/litigation/investreport/34-81207.pdf.
115 SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946).
116 The DAO, SEC Release No. 81207.
120 SEC Chairman Jay Clayton, “Statement on Cryptocurrencies and Initial Coin Offerings,” https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.
122 OCIE, National Exam Program, Risk Alert: Observations from Cybersecurity Examinations (Aug. 7, 2017) https://www.sec.gov/files/observations-from-cybersecurity-examinations.pdf.
124 SEC Release 2017-176 (Sept. 25, 2017), https://www.sec.gov/news/press-release/2017-176.
126 17 C.F.R. § 248.30(a).
127 Testimony of Jay Clayton before the U.S. House of Representatives Committee on Financial Services (Oct. 4, 2017), https://www.sec.gov/news/testimony/testimony-examining-secs-agenda-operation-and-budget.
128 In re: Pending Administrative Proceedings, Securities Act Release No. 10440 (Nov. 30, 2017), https://www.sec.gov/litigation/opinions/2017/33-10440.pdf.
129 U.S. Const., art. II, § 2, cl. 2.
130 Buckley v. Valeo, 424 U.S. 1, 126 (1976).
131 Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 286 (D.C. Cir. 2016).
132 SEC v. Bandimere, 844 F.3d 1168, 1179 (10th Cir. 2016).
134 Lucia v. SEC, No. 17-130 (U.S.).
135 Financial CHOICE Act of 2017, H.R. 10, 115th Cong. (2017-2018).
136 H.R. 10, 115th Cong. (2017), § 821.

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