\n<\/p>\n
Thursday, January 4, 2018<\/span> <\/p>\n<\/p><\/div>\n<\/div>\n<\/div>\n The securities litigation and regulatory landscape in 2017 defies simple categorization.\u00a0 Plaintiffs filed 226 new federal class actions in the first half of 2017, more than double the average rate over the last 20 years,1<\/sup>\u00a0and an additional 99 federal class actions in the third quarter of 2017.2<\/sup>\u00a0 In contrast, new SEC enforcement proceedings declined.\u00a0 After staying on pace with the prior two years with 45 new enforcement actions against public company-related defendants in the first half of fiscal year 2017, the SEC filed only 17 new enforcement actions against public company-related defendants in the second half of the year.3<\/sup>\u00a0 The apparent decrease in initiation of enforcement proceedings coincides with the arrival at the SEC of Chairman Walter J. Clayton, who has expressed the view that enforcement actions against issuers rather than individual wrongdoers too often punish the very investors they seek to protect.4<\/sup><\/p>\n Amidst this activity, there were a number of important legal and regulatory developments, including in the following areas:<\/p>\n In\u00a0Kokesh v. SEC<\/em>,5<\/sup>\u00a0the Supreme Court held that the SEC\u2019s 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. \u00a7 2462, which provides that \u201can 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.\u201d6<\/sup>\u00a0 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.\u00a0 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.\u00a0 Although the District Court limited recovery of the civil penalty to funds Kokesh received within five years of the SEC\u2019s 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. \u00a7 2462 does not apply to disgorgement because it is not a \u201ccivil fine, penalty, or forfeiture.\u201d7<\/sup>\u00a0 The Tenth Circuit affirmed the District Court\u2019s judgment with respect to disgorgement.<\/p>\n The Supreme Court reversed in an unanimous decision, holding that disgorgement is a \u201cpenalty\u201d under 28 U.S.C. \u00a7 462.\u00a0 The Court explained that the purpose of disgorgement, to deter future violations by requiring the forfeiture of profits from securities violations, is \u201cinherently punitive.\u201d8<\/sup>\u00a0 The remedy is not compensatory in nature because, when it seeks disgorgement, the SEC does so on behalf of the public at large, rather than on behalf of \u201can aggrieved individual,\u201d9<\/sup>\u00a0and profits are paid to the district court,\u201d not to victims.10<\/sup>\u00a0 Thus, the Court ruled that the SEC may not seek disgorgement for misappropriation that occurred more than five years before the SEC filed its complaint.11<\/sup><\/p>\n Kokesh<\/em>\u00a0further limits the remedies available to the SEC outside the five-year limitations period set forth in 28 U.S.C. \u00a7 462, which the Supreme Court previously held applies to statutory monetary penalties.12<\/sup>\u00a0\u00a0Kokesh<\/em>\u00a0likely will have several important effects in SEC enforcement actions, including potentially reducing the SEC\u2019s leverage in settlement negotiations, limiting investigations involving older conduct, and motivating the SEC to seek tolling agreements to extend the limitations period as much as possible.\u00a0 Steve Peikin, Co-Director of the Division of Enforcement, remarked that, in light of\u00a0Kokesh<\/em>, the SEC \u201c[has] no choice but to respond by redoubling our efforts to bring cases as quickly as possible.\u201d13<\/sup>\u00a0 The SEC also may attempt to seek remedies other than disgorgement in order to avoid the potential preclusive effect of the five-year limitations period.\u00a0 For example, post-Kokesh<\/em>, the Eighth Circuit held that a permanent injunction enjoining the defendant from future violations of the securities laws was not a \u201cpenalty\u201d under 28 U.S.C. \u00a7 462 because \u201c[t]he historic injunctive process was designed to deter, not to punish.\u201d14<\/sup><\/p>\n In\u00a0California Public Employees Retirement System v. ANZ Securities, Inc.<\/em>,15<\/sup>\u00a0the Supreme Court held that the\u00a0American Pipe<\/em>\u00a0doctrine does not toll the three-year statute of repose under Section 13 of the Securities Act.<\/p>\n 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.\u00a0 The plaintiffs alleged that the Lehman Brothers\u2019 registration statement for certain securities offerings contained material misstatements and omissions.\u00a0 California Public Employees Retirement System (\u201cCalPERS\u201d) opted out of a subsequent class settlement and in 2011 filed an individual action against Lehman Brothers in the Northern District of California.\u00a0 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.\u00a0 CalPERS countered that the three-year time bar was tolled under\u00a0American Pipe<\/em>, 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<\/sup>\u00a0 The District Court rejected the tolling argument and dismissed CalPERS\u2019 individual action as untimely.\u00a0 The Second Circuit affirmed.<\/p>\n The Supreme Court granted certiorari and affirmed.\u00a0 The Supreme Court distinguished\u00a0American Pipe<\/em>, explaining that the equitable justifications for tolling a statute of limitations are not applicable to statutes of repose such as Section 13.\u00a0 Unlike a statute of limitations, which \u201c[is] designed to encourage plaintiffs to pursue diligent prosecution of known claims,\u201d17<\/sup>\u00a0the \u201cobject of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity.\u201d18<\/sup>\u00a0 \u201c[T]he text, purpose, structure, and history of [Section 13] all disclose the congressional purpose to offer defendants full and final security after three years.\u201d19<\/sup>\u00a0 As a statute of repose, Section 13 \u201cdisplaces the traditional power of courts to modify statutory time limits in the name of equity.\u201d20<\/sup><\/p>\n ANZ<\/em>\u00a0should incentivize larger stockholders to file individual actions under Section 11 relatively soon after a class action complaint is filed.\u00a0 The impact of\u00a0ANZ<\/em>\u00a0may 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\u00a0American Pipe<\/em>.21<\/sup>\u00a0 For average investors, moreover, the costs of filing individual actions will continue to far outweigh the benefits, muting concerns that\u00a0ANZ<\/em>\u00a0will open the \u201cfloodgates\u201d to individual securities fraud actions.\u00a0<\/p>\n In\u00a0In re Petrobras Securities Litigation<\/em>,22<\/sup>\u00a0the Second Circuit revisited the \u201cpredominance\u201d requirement for certifying a securities class action under Federal Rule of Civil Procedure 23(b)(3).<\/p>\n Petrobras<\/em>\u00a0arose out of an alleged money-laundering and kick-back scheme by Petr\u00f3leo Brasileiro S.A. (\u201cPetrobras\u201d), a multinational oil and gas company headquartered in Brazil.\u00a0 After the scheme was revealed, investors brought claims against Petrobras and its officers and directors under both the Securities Act and the Exchange Act.\u00a0 Judge Jed Rakoff of the Southern District of New York granted class certification, and Petrobras appealed, arguing that individual questions predominated as to whether class members purchased Petrobras stock in U.S. transactions or on foreign exchanges, constituting foreign transactions not covered by the federal securities laws under\u00a0Morrison v. National Australia Bank<\/em>.23<\/sup><\/p>\n The Second Circuit reversed and remanded for further factual findings on whether common questions predominated.\u00a0 The Second Circuit explained that, when a district court considers whether individual issues relevant to determining whether the federal securities law apply under\u00a0Morrison<\/em>\u00a0predominate, it must determine whether the question of domesticity (i.e.<\/em>, whether the securities transactions at issue had a sufficient connection to the United States) is \u2018\u201csusceptible to generalized class-wide proof\u2019 such that it represents a \u2018common\u2019 question rather than an \u2018individual\u2019 one.\u201d24<\/sup>\u00a0 In this case, the Second Circuit could not conclude that common questions predominated over individual questions given the numerous domestic and foreign entity purchasers and varying methods of purchasing Petrobras securities.25<\/sup>\u00a0 The Second Circuit expressed skepticism that the domesticity question was susceptible to class-wide proof because the class included secondary-market purchasers that would have to trace their purchases to a domestic market.\u00a0 That inquiry would require different proof than for primary market purchasers.\u00a0 \u201cIn this case, the potential for variation across putative class members\u2014who sold them the relevant securities, how those transactions were effectuated, and what forms of documentation might be offered in support of domesticity\u2014appears to generate a set of individualized inquiries that must be considered within the framework of Rule 23(b)(3)’s predominance requirement.\u201d26<\/sup><\/p>\n A petition for certiorari seeking review of the Second Circuit\u2019s decision is pending before the Supreme Court.27<\/sup>\u00a0 If the decision stands, it would complicate the ability of securities plaintiffs to achieve certification of putative classes that include both U.S. and non-U.S. purchasers.\u00a0 But it would not foreclose the possibility of certifying such classes.\u00a0 The Second Circuit suggested that district courts may in effect circumvent certification challenges under\u00a0Morrison<\/em>\u00a0by utilizing case management techniques, including bifurcating proceedings \u201cto hone in on threshold class-wide inquiries.\u201d28<\/sup>\u00a0 In addition, despite a challenge under\u00a0Petrobras<\/em>, the United States District Court for the Southern District of Texas recently certified a class that \u201ccould conceivably\u201d include members that engaged in foreign transactions, noting \u201cthe ease of determining whether that was the case.\u201d29<\/sup><\/p>\n In\u00a0Basic v. Levinson<\/em>,30<\/sup>\u00a0the Supreme Court explained that market efficiency is essential to certification of class actions asserting Section 10(b) claims because such claims require a showing that plaintiffs relied on the alleged misrepresentation.\u00a0 Although this ordinarily would require a highly fact-specific individual assessment, a court may presume that all investors rely on the integrity of the market price of a security as reflecting all public information, including any fraudulent statements, when a stock trades in an efficient market.31<\/sup>\u00a0 This \u201cfraud-on-the-market\u201d theory allows class action plaintiffs to utilize a presumption of reliance, eliminating the need for individual inquiries in connection with class certification.\u00a0 Absent availability of a fraud-on-the-market presumption, it would be virtually impossible for plaintiffs to maintain Section 10(b) class actions.32<\/sup><\/p>\n In connection with their appeal of Judge Rakoff\u2019s class certification order (described in the preceding section), the\u00a0Petrobras<\/em>\u00a0defendants argued that the fraud-on-the-market presumption was unavailing because plaintiffs failed to show that \u201cthe defendant’s stock tends to respond to pertinent publicly reported events.\u201d33<\/sup>\u00a0 The Second Circuit disagreed, explaining that Judge Rakoff\u2019s \u201cblended consideration of direct and indirect evidence of market efficiency\u201d was an appropriate basis for applying the fraud-on-the-market presumption.34<\/sup>\u00a0 The Second Circuit explained that, to determine whether a stock trades in an efficient market, courts may consider both indirect evidence, including \u201chigh trading volume, extensive analyst coverage, multiple market makers, large market capitalization, and an issuer’s eligibility for simplified SEC filings,\u201d and direct evidence, including \u201cempirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price.\u201d35<\/sup>\u00a0 The Court also rejected defendants\u2019 argument that plaintiffs must show \u201cmarket efficiency based on directional empirical evidence alone, irrespective of any other evidence they may have offered.\u201d36<\/sup>\u00a0 This theory would \u201crelabel a sufficient condition as a necessary one,\u201d and neglect that \u201cindirect evidence is particularly valuable in situations where direct evidence does not entirely resolve the question.\u201d37<\/sup><\/p>\n Only three years ago, many commentators and practitioners were predicting the demise of the fraud-on-the-market presumption of reliance when the Supreme Court granted certiorari in a case\u00a0 challenging the continued viability of this theory.\u00a0 But, in\u00a0Halliburton Company v. Erica P. John Fund, Inc. (Halliburton II)<\/em>,38<\/sup>\u00a0the Supreme Court declined to abrogate the fraud-on-the-market theory.\u00a0 Petrobras confirms that it remains alive and well.\u00a0 Securities class action defendants can take some comfort in the Supreme Court\u2019s recent class action jurisprudence holding, among other things, that all the prerequisites to class certification must be proven at the class certification stage (even if those requirements overlap with merits determinations) and permitting defendants to introduce and requiring courts to consider evidence at the class certification stage to rebut the presumption of reliance.39<\/sup>\u00a0 Nonetheless, it remains challenging to defeat the presumption in Section 10(b) class actions.40<\/sup><\/p>\n The Supreme Court will decide whether state courts retain concurrent jurisdiction to hear Securities Act class actions.\u00a0 On November 28, the Supreme Court heard oral argument in\u00a0Cyan Inc. et al. v. Beaver County Employees’ Retirement Fund<\/em>.\u00a0 The dispute focuses on interpretation of the \u201cconforming amendment\u201d to the Securities Act that Congress passed as part of SLUSA.\u00a0 The statute provides that state courts continue to have concurrent jurisdiction over claims under the Securities Act except with respect to \u201ccovered class actions.\u201d\u00a0 A \u201ccovered class action\u201d is defined as \u201cany single lawsuit in which . . .\u00a0 damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members.\u201d41<\/sup><\/p>\n In Cyan, the appellant has taken the position that \u201ccovered class actions\u201d includes only actions based solely on claims arising under the Securities Act.\u00a0 In contrast, the appellee argues that SLUSA \u201cstrips state courts of jurisdiction over mixed cases,\u201d in which a plaintiff advances a claim under the Securities Act along with \u201ca prohibited state law claim.\u201d42<\/sup>\u00a0\u00a0The federal district courts are split on the question:\u00a0 the dominant view around the country is that state courts have subject matter jurisdiction over covered class actions that allege only Securities Act claims, while a growing consensus within the Second Circuit is that they do not.43<\/sup>\u00a0 A ruling in favor of the appellant likely would bring an end to state court Securities Act class actions, which have exploded in California, for instance, by 1,400 percent since 2011.44<\/sup><\/p>\n In 2015, the Supreme Court issued its decision\u00a0Omnicare v. Laborers District Council Construction Industry Fund<\/em>,45<\/sup>\u00a0holding that, in order to plead a Section 11 claim based on an allegedly false or misleading statement of opinion, a plaintiff must allege not only that the statement was actually false but that the defendant subjectively did not believe the statement in question: \u00a0\u201c[A] sincere statement of pure opinion is not an untrue statement of material fact, regardless whether an investor can ultimately prove the belief wrong.\u201d46<\/sup>\u00a0Nonetheless, if\u00a0 a \u201cregistration statement omits material facts about the issuer\u2019s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then \u00a7 11\u2019s omissions clause creates liability.\u201d47<\/sup><\/p>\n In\u00a0City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc.<\/em>,48<\/sup>\u00a0the Ninth Circuit extended\u00a0Omnicare<\/em>\u00a0to Section 10(b) claims.<\/em>\u00a0\u00a0The dispute arose out of Align Technology, Inc.\u2019s acquisition of Cadent Holdings, Inc.\u00a0 Align acquired Cadent for $187.6 million, announcing at the time that $76.9 million of the value was goodwill associated with certain Cadent business units. \u00a0Those business units went on to underperform Align\u2019s growth projections, and Align eventually wrote down the goodwill to zero. \u00a0Plaintiffs commenced a putative class action asserting that Align violated Section 10(b) on the ground that it knew Cadent had artificially inflated goodwill at the time of the acquisition. \u00a0The United States District Court for the Central District of California dismissed the action on the basis that the plaintiffs failed to allege that Align subjectively believed that the goodwill valuations, which the Court deemed to be classic opinion statements, were false.49<\/sup><\/p>\n In affirming, the Ninth Circuit held that the complaint was required to contain \u201callegations of subjective falsity.\u201d50<\/sup>\u00a0\u00a0The plaintiffs argued on appeal that they were not required to plead that Align subjectively believed that its goodwill valuations were false, but rather that there was no reasonable basis for the belief. \u00a0The Ninth Circuit rejected that argument, extending\u00a0Omnicare\u00a0<\/em>to Section 10(b) claims because \u201cSection 10(b)[] contains an identical limitation of liability to untrue statement[s] and omissions of fact.\u201d51<\/sup>\u00a0\u00a0The Court explained that\u00a0Omnicare<\/em>\u00a0created different standards for pleading a misrepresentation or material omission based on a statement of opinion.\u00a0 Under the standards applicable to misrepresentations and materially misleading opinion statements, a plaintiff must plead both objective and subjective falsity.52<\/sup>\u00a0 But under the standard applicable to omissions, a plaintiff must plead \u201cfacts going to the basis for the issuer\u2019s opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.53<\/sup>\u201d\u00a0 Because the plaintiffs failed to allege omissions that \u201ccall[ed] into question the issuer\u2019s basis for offering the opinion,\u201d the plaintiffs\u2019 failure to allege subjective falsity was fatal to their claims.54<\/sup><\/p>\n In\u00a0Align<\/em>, the Ninth Circuit joined the Second Circuit in extending\u00a0Omnicare<\/em>\u2019s pleading standard for statements of opinion to Section 10(b) claims.55<\/sup>\u00a0 These decisions should reduce the risk that issuers and management will face antifraud liability for honest, subjectively held statements of opinion.\u00a0 They do not eliminate the risk, however, since plaintiffs may attempt to compensate by relying more heavily on an \u201comissions\u201d theory of liability for statements of opinion, which does not require a showing of subjective falsity, only that facts were omitted that made the opinion objectively misleading to a reasonable investor.\u00a0 As the Supreme Court cautioned in\u00a0Omnicare<\/em>, however, meeting this standard will be \u201cno small task for an investor.\u201d56<\/sup><\/p>\n In\u00a0Stadnick v. Vivint Solar<\/em>,57<\/sup>\u00a0the Second Circuit confirmed that the operative test to determine whether omitted interim financial data requires disclosure under Section 11 is the traditional\u00a0TSC\u00a0<\/em>standard of whether a reasonable investor would view the omission as \u201csignificantly altering the total mix of information made available.\u201d58<\/sup>\u00a0\u00a0In\u00a0Shaw v. Digital Equipment Corp.<\/em>, the First Circuit previously held that an omission may be material if the \u201cnonpublic information indicat[es]\u201d a substantial likelihood that the company\u2019s performance or financial results \u201cwill be an extreme departure from the range of results which could be anticipated based on currently available information.\u201d59<\/sup><\/p>\n In\u00a0Stadnick<\/em>, a stockholder brought Section 11 claims alleging that Vivint Solar Inc., a solar energy company, misled investors by including in its registration statement financial statements that omitted the latest quarterly metric of income available to stockholders and earnings per share.60<\/sup>\u00a0\u00a0The plaintiff argued that this information should have been disclosed because it evidenced an \u201cextreme departure\u201d from the company\u2019s previous performance. \u00a0Judge Katherine Forrest of the Southern District of New York dismissed the claims, holding that the \u201cextreme departure\u201d test was not implicated because all material financial information was \u201cfully disclosed in [Vivint\u2019s] Registration Statement.\u201d61<\/sup><\/p>\n The Second Circuit affirmed, but took the opportunity to reject the First Circuit\u2019s \u201cextreme departure test\u201d in favor of the \u201ctotal mix\u201d test. \u00a0The Second Circuit observed that the \u201ctotal mix\u201d test is the \u201cclassic\u201d standard of materiality articulated by the Supreme Court over 40 years ago in\u00a0TSC Industries, Inc. v. Northway, Inc.<\/em>62<\/sup>\u00a0\u00a0According to the Court, \u201cShaw<\/em>\u2019s \u2018extreme departure\u2019 test leaves too many open questions, such as: the degree of change necessary for an \u2018extreme departure\u2019; which metrics courts should look to in assessing whether such a departure has occurred; and the precise role of the familiar \u2018objectively reasonable investor\u2019 in assessing whether a departure is extreme.\u201d63<\/sup>\u00a0\u00a0Moreover, the \u201cextreme departure\u201d test can be \u201canalytically counter-productive\u201d in situations like the one in\u00a0Vivint<\/em>, where there was indeed an \u201cextreme departure\u201d from Vivint\u2019s past performance in the omitted metrics, but those metrics were not \u201cfair indicators\u201d of Vivint\u2019s actual financial performance.64<\/sup>\u00a0\u00a0By contrast, the traditional materiality test \u201cexamines omissions in the context of the total mix of available investor information.\u201d65<\/sup>\u00a0 In\u00a0Stadnick<\/em>, the alleged omissions did not meet this standard because \u201cthere was never a trend of the shareholders\u2019 income increasing or decreasing,\u201d Vivint\u2019s total income and revenue was unaffected by shareholder income fluctuations, and \u201cVivint\u2019s registration statement contained ample warnings and disclosures that explained shareholder revenue and earning fluctuations.\u201d66<\/sup><\/p>\n Although\u00a0Stadnick<\/em>\u00a0expressly disavows the \u201cextreme departure test,\u201d it is not clear that the First Circuit ever viewed its holding in\u00a0Shaw<\/em>\u00a0as more than an as-applied expression of the traditional standard for materiality set forth in\u00a0TSC Industries<\/em>.\u00a0 Notably, the\u00a0Shaw<\/em>\u00a0court \u201creject[ed] any bright-line rule that an issuer engaging in a public offering is obligated to disclose interim operating results for the quarter in progress whenever it perceives a possibility that the quarter\u2019s results may disappoint the market.\u201d67<\/sup><\/p>\n In\u00a0City of Providence, v. BATS Global Markets, Inc.,<\/em>68<\/sup>\u00a0the Second Circuit reversed the dismissal of a class action asserting Section 10(b) claims against several national securities exchanges and high-frequency trading firms (\u201cHFTs\u201d), holding that the exchanges did not enjoy absolute immunity from private securities fraud suits.<\/p>\n 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. \u00a0The complaint focused on three products and services: \u00a0proprietary data feeds, co-location services and complex order types. \u00a0The plaintiffs alleged that ordinary investors could not afford these products and services, which allegedly allowed HFTs to \u201cfront-run\u201d ordinary investors by providing HFTs with data earlier than other market participants and facilitating HFT trades faster than trades for ordinary investors. \u00a0The United States District Court for the Southern District of New York dismissed plaintiffs\u2019 claims, holding that the exchanges were immune from suit, and the plaintiffs failed to state a Section 10(b) claim.<\/p>\n The Second Circuit reversed and remanded. \u00a0The Court held that the exchanges did not enjoy absolute immunity from private securities litigation because the exchanges were not acting as market regulators in establishing the products and services.69<\/sup>\u00a0The Court explained that the products and services at issue were not \u201cregulatory commands by the exchanges compelling traders to behave in certain ways,\u201d but rather constituted \u201cconduct to operate [the exchanges\u2019] own market\u00a0.\u00a0.\u00a0. distinct from [their] oversight role\u201d; thus, the exchanges were \u201cnot entitled to the same protections of immunity that would otherwise be afforded\u201d to regulators because they were \u201cacting as []\u00a0regulated<\/em>\u00a0entit[ies] \u2013 not [as]\u00a0regulator[s]<\/em>.\u201d70<\/sup>\u00a0 Moreover, the Court held that\u00a0 allegations that the exchanges failed to disclose the manipulative effect of these products and services on trading for ordinary investors were sufficient to state a Section 10(b) claim.71<\/sup><\/p>\n In his concurrence, Judge Raymond Lohier added as an additional justification for the holding his support for \u201cdeference to the SEC\u2019s reasonable and persuasive position\u201d on the questions raised in the appeal.72<\/sup>\u00a0\u00a0In reaching this position, Judge Lohier relied on the Supreme Court\u2019s 1944 decision\u00a0Skidmore v. Swift & Co.<\/em>, which held that an agency\u2019s views may be given weight based on \u201cthe thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.\u201d73<\/sup>\u00a0 It is unclear whether the Supreme Court, as currently composed, would be receptive to Judge Lohier\u2019s rationale.74<\/sup><\/p>\n In\u00a0SEC v. Traffic Monsoon, LLC<\/em>, Judge Jill Parish of the United States District Court for the District of Utah held that the SEC may bring fraud claims arising from extraterritorial securities transactions to the extent there also is wrongful conduct within the United States.75<\/sup><\/p>\n Traffic Monsoon LLC sold \u201cAdPacks\u201d of fake page views and advertisement click-throughs that make a website appear more popular than it is by artificially inflating the website\u2019s views. \u00a0The AdPacks, which constituted 98% of Traffic Monsoon\u2019s revenue, permitted customers to share in the revenue of Traffic Monsoon by receiving credits to their accounts if they clicked on a number of websites each day.\u00a0 90% of customers who purchased AdPacks resided outside the United States and were presumed to have purchased the AdPacks in their home countries. \u00a0The SEC brought a civil suit against Traffic Monsoon, alleging that the AdPacks constituted a Ponzi scheme in violation of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act.\u00a0 Traffic Monsoon argued that the District Court lacked subject matter jurisdiction because Section 10(b) and Section 17(a) do not apply to extraterritorial securities transactions. \u00a0Traffic Monsoon urged the Court to apply the Supreme Court\u2019s transactional test articulated in\u00a0Morrison<\/em>, which confers jurisdiction over securities transactions \u201conly in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.\u201d76<\/sup><\/p>\n The District Court disagreed, holding that it possessed subject matter jurisdiction under the \u201cconduct and effects\u201d test, which extends the reach of the federal securities laws to extraterritorial transactions where \u201c(1) conduct within the United States that constitutes significant steps in furtherance of the violation, . . . or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.\u201d77<\/sup>\u00a0Although the Supreme Court\u2019s decision in\u00a0Morrison<\/em>\u00a0replaced the \u201cconduct and effects\u201d test with a transactional test, the District Court held that Section 929P(b) of the Dodd-Frank Act superseded\u00a0Morrison<\/em>.\u00a0 Examining the \u201clegal context in which [Section 929P(b)] was drafted, legislative history, and the expressed purpose of the amendment,\u201d the Court concluded that Congress intended that, in actions brought by the SEC, Sections 10(b) and 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.78<\/sup>\u00a0\u00a0Applying the test, the Court held that it had jurisdiction over the SEC\u2019s claims because Traffic Monsoon took significant steps in furtherance of the \u201cAdPack\u201d scheme within the United States, noting that Traffic Monsoon was \u201cconceived and created . . . in the United States\u201d and \u201cpromoted the AdPack investments over the internet while . . . in Utah.\u201d79<\/sup>\u00a0\u00a0In the alternative, the Court held that\u00a0Morrison<\/em>\u2019s transactional test was satisfied because Traffic Monsoon \u201csold all of the AdPacks over the internet to both foreign and domestic purchasers.\u201d80<\/sup><\/p>\n The District Court\u2019s decision, which is on appeal to the Tenth Circuit,81<\/sup>\u00a0is 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<\/sup>\u00a0 If the decision stands, it will likely increase the risk of liability through SEC or DOJ enforcement actions for companies offering securities globally. \u00a0The District Court noted, however, that \u201cSection 929P(b) is explicitly limited to actions brought by the SEC or the United States.\u00a0 Thus,\u00a0Morrison<\/em>\u00a0would still control in a private cause of action brought under Section 10(b).\u201d83<\/sup>\u00a0 Therefore,\u00a0Morrison\u00a0<\/em>continues to provide companies offering securities abroad a meaningful basis to support a motion to dismiss (and oppose class certification under the Second Circuit\u2019s\u00a0Petrobras\u00a0<\/em>decision, described above).<\/p>\n In\u00a0United States v. Martoma<\/em>,84<\/sup>\u00a0the Second Circuit held that tippees may be convicted for trading on material, non-public information conveyed to the tippee as a gift, even if the tipper and tippee do not share a \u201cmeaningfully close relationship\u201d as had been required by the Second Circuit in its decision in\u00a0United States v. Newman<\/em>.85<\/sup><\/p>\n In\u00a0Newman<\/em>, the Second Circuit held that a tipper\u2019s gift of information constitutes a personal benefit sufficient to support insider trading liability only if there is some \u201cproof of a meaningfully close personal relationship [between the tipper and tippee] that generates . . . at least a potential gain of a pecuniary or similarly valuable nature.\u201d86<\/sup>\u00a0\u00a0Newman\u00a0<\/em>thus narrowed the scope of impermissible insider trading to situations where the tipper had a \u201cclose personal relationship\u201d to the tippee and stood to receive a \u201cpotential gain\u201d from the gift. \u00a0The Supreme Court disagreed with this aspect of\u00a0Newman<\/em>\u00a0in its 2016 decision\u00a0Salman v. United States<\/em>, explaining that \u201c[t]o the extent the Second Circuit held that the tipper must also receive something of a \u2018pecuniary or similarly valuable nature\u2019 in exchange for a gift to family or friends . . . this requirement is inconsistent with [the Supreme Court\u2019s 1983 decision]\u00a0Dirks<\/em>\u00a0[v. SEC<\/em>].\u201d87<\/sup><\/p>\n In\u00a0Martoma<\/em>, the Second Circuit confirmed that the \u201cmeaningfully close relationship\u201d test set forth in\u00a0Newman\u00a0<\/em>is \u201cno longer good law.\u201d88<\/sup>\u00a0 There, Matthew Martoma, an investment manager, consulted with doctors regarding a new Alzheimer\u2019s drug then in clinical trials\u00a0 After learning of negative test results from one of the doctors involved in the testing, Martoma\u2019s investment company sold its positions in the companies developing the drug before the results became public, avoiding an estimated $194.6 million dollar loss.\u00a0 Martoma was charged and convicted of insider trading by a jury in the Southern District of New York.\u00a0 Martoma appealed to the Second Circuit, arguing that under\u00a0Newman<\/em>, the jury was not properly instructed that the government must prove Martoma and the doctor who gave him the tip shared a \u201cclose personal relationship.\u201d<\/p>\n The Second Circuit rejected Martoma\u2019s argument, concluding that the Supreme Court\u2019s decision in\u00a0Salman<\/em>\u00a0superseded\u00a0Newman\u2019s\u00a0<\/em>\u201cmeaningfully close relationship\u201d requirement. \u00a0The Court explained that a tipper\u2019s gift of insider information is the \u201cfunctional equivalent of trading on the information himself and giving a cash gift to the recipient.\u201d89<\/sup>\u00a0\u00a0\u201c[T]he personal benefit one receives from giving a gift of inside information is not the friendship or loyalty or gratitude of the recipient of the gift; it is the imputed pecuniary benefit of having effectively profited from the trade oneself and given the proceeds as a cash gift.\u201d90<\/sup>\u00a0\u00a0If an insider discloses information \u201cwith the expectation that [the recipient] would trade on it . . . and the disclosure resemble[s] trading by the insider followed by a gift of the profits to the recipient,\u201d then the personal benefit requirement is satisfied.91<\/sup>\u00a0\u00a0Applying this framework, the Court held that the evidence was sufficient to show that the doctor who gifted Martoma the confidential clinical trial information received a personal benefit giving rise to liability.92<\/sup><\/p>\n Although\u00a0Salman<\/em>\u00a0and\u00a0Martoma<\/em>\u00a0laid to rest\u00a0Newman<\/em>\u2019s holding that a tipper must have a \u201cmeaningfully close personal relationship\u201d with a tippee and must receive something of a \u201cpecuniary or similarly valuable nature\u201d in return for the gift of information, the decisions do not appear to affect the aspect of\u00a0Newman<\/em>\u2019s holding that the government cannot meet its burden \u201cwithout establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure.\u201d93<\/sup>\u00a0 That was not at issue in\u00a0Martoma<\/em>\u00a0or\u00a0Salman<\/em>.\u00a0 Thus, in future cases, defendants may continue to raise the argument that, although a gift may have been provided, the government did not meet its burden of demonstrating that a remote tippee had knowledge of the benefit received by the insider for disclosing the information.\u00a0 That argument may not be viable, however, unless, as in\u00a0Newman<\/em>, the remote tippee \u201c\u2018knew next to nothing\u2019 about the tipper[], [was] unaware of the circumstances of how the information was obtained, and \u2018did not know what the relationship between the [tipper] and the first-level tippee was.\u2019\u201d94<\/sup><\/p>\n In\u00a0Perry v. Duoyuan Printing, Inc.<\/em>,95<\/sup>\u00a0Judge 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.<\/p>\n The Second Circuit has long held that the public policy embodied in the federal securities laws prohibits indemnity in favor of a defendant found to have \u201ccommitted a sin graver than ordinary negligence.\u201d96<\/sup>\u00a0 This concept has been applied to prohibit indemnification claims brought by a defendant who \u201csettles securities law claims without admitting fault, unless that party actually demonstrates that it is without fault.\u201d97<\/sup><\/p>\n In\u00a0Perry<\/em>, investors brought a putative class action asserting Section 11 and Section 10(b) claims against Duoyuan Printing, Inc., a Chinese publishing machinery company, and its underwriters for overstating the company\u2019s revenues in connection with its IPO.\u00a0 After both Duoyuan and the underwriters settled with plaintiffs without admitting fault, the underwriters filed cross-claims against Duoyuan seeking indemnification under underwriting agreements in which the issuer agreed to \u201cindemnify and hold harmless each Underwriter.\u201d<\/p>\n The Court dismissed the underwriters\u2019 indemnification claims.\u00a0 Notably, the Court declined to give the underwriters an opportunity to prove the absence of fault.98<\/sup>\u00a0 The Court noted that, in previous cases in which indemnification was allowed, the indemnitor either stipulated or was adjudicated at trial to be more at fault than the settling co-defendant who sought indemnification.99<\/sup>\u00a0 That was not the case here.\u00a0 Moreover, the Court observed that the underwriters \u201cproduced no evidence . . . to demonstrate they were without fault,\u201d and the denial of their motion to dismiss in the underlying securities fraud action \u201cweigh[ed] against a finding that they successfully demonstrated their lack of fault.\u201d100<\/sup>\u00a0 Rather than allow a settling party to re-litigate the settled claim, the court reasoned, the public policy against indemnifying wrongdoing embodied in the securities law must prevail over the general policy of encouraging settlements.101<\/sup><\/p>\n Judge Daniels\u2019 ruling has received scant attention from courts and commentators since it was issued in early 2017.\u00a0 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.\u00a0 At minimum,\u00a0\n
I.\u00a0\u00a0 Statutes of Limitations and Repose<\/h3>\n
A.\u00a0\u00a0 SEC Disgorgement Remedy Subject to Five-Year Statute of Limitations<\/h4>\n
B.\u00a0Statute of Repose Not Tolled Under\u00a0American Pipe<\/em><\/h3>\n
II.\u00a0Class Actions<\/h3>\n
A.\u00a0\u00a0Second Circuit Holds That Individualized\u00a0Morrison<\/em>\u00a0Questions May Defeat Class Certification<\/h4>\n
B.\u00a0Second Circuit Considers Sufficiency of Indirect Evidence for Establishing Fraud-On-The-Market Presumption<\/h3>\n
C.\u00a0Supreme Court to Decide Whether State Courts Have Subject Matter Jurisdiction Over Class Actions That Allege Only Securities Act Claims<\/h3>\n
III. Securities Fraud<\/h3>\n
A.\u00a0\u00a0Ninth Circuit Extends\u00a0Omnicare\u2019s<\/em>\u00a0Pleading Requirements for Statements of Opinion to Section 10(b) Claims<\/h4>\n
B.\u00a0Second Circuit Splits with First Circuit Over the Standard for Materiality in an Omissions Case<\/h3>\n
C.\u00a0Second Circuit Confirms That National Exchanges May Face Liability for Private Securities Fraud Claims<\/h3>\n
D.\u00a0\u00a0 Utah District Court Reinstates the \u201cConduct and Effects\u201d Test for Extraterritorial Securities Transactions in Actions Brought by the SEC<\/h3>\n
IV.\u00a0Insider Trading<\/h3>\n
V.\u00a0Indemnification<\/h3>\n