(Article from Securities Law Alert, Year in Review 2017)
For more information, please visit the Securities Law Alert Resource Center
D.C. Circuit: (1) Distributing a Statement Authored and Approved by a Superior Does Not Constitute “Making” a Statement Under Janus, But (2) Liability Under Rules 10b-5(a) and (c) Is Not Limited to “Makers” of Statements
On September 29, 2017, the D.C. Circuit held that a broker who had copied, pasted, and distributed false statements that his boss authored could not be liable under Rule 10b-5(b) as a “maker” of those statements within the meaning of the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011).[1] Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir. 2017). The D.C. Circuit deemed it significant that the broker’s boss had “approved the messages for distribution.” The court found this demonstrated the boss’s “ultimate authority over the substance and distribution of the emails.”
The D.C. Circuit further held that the broker could nevertheless be liable under Rules 10b-5(a) and (c) and Section 17(a)(1)[2] because those sections “do not speak in terms of an individual’s ‘making’ a false statement.” The D.C. Circuit stated that “Rules 10b-5(a) and (c), as well as Sections 10(b) and 17(a)(1), may encompass certain conduct involving the dissemination of false statements even if the same conduct lies beyond the reach of Rule 10b-5(b).”
Ninth Circuit: CEO’s Failure to Comply with “Aspirational” Corporate Ethics Code Does Not Give Rise to a Claim for Securities Fraud Under Section 10(b) and Rule 10b-5
On January 19, 2017, the Ninth Circuit held that a CEO’s violation of the company’s ethics code did not give rise to a claim for securities fraud under Section 10(b) and Rule 10b-5 on the grounds that corporate ethics codes are “inherently aspirational.” Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard, 845 F.3d 1268 (9th Cir. 2017). The court explained that “a code of conduct … expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations.”
The Ninth Circuit held that corporate ethics statements cannot constitute affirmative misrepresentations for Rule 10b-5 purposes. The court reasoned that a “contrary interpretation” would be “simply untenable” because it would allow plaintiffs to frame virtually any claim of corporate wrongdoing as a securities fraud violation.
Ninth Circuit: (1) PSLRA’s Safe Harbor Does Not Protect Non-Forward-Looking Representations Included in a Forward-Looking Statement, and (2) Cautionary Language Must Specifically Address the Possible Inaccuracy of Such Non-Forward-Looking Representations
On July 28, 2017, the Ninth Circuit held that “a defendant may not transform non-forward-looking statements into forward-looking statements that are protected by the safe harbor provisions of the” Private Securities Litigation Reform Act (“PSLRA”) “by combining non-forward-looking statements about past or current facts with forward-looking statements about projected revenues and earnings.” In re Quality Sys. Sec. Litig., 865 F.3d 1130 (9th Cir. 2017). The court reasoned that “[t]he mere fact that a statement contains some reference to a projection of future events cannot sensibly bring the statement within the safe harbor if the allegation of falsehood relates to non-forward-looking aspects of the statement.” Id. (quoting In re Stone & Webster Sec. Litig., 414 F.3d 187 (1st Cir. 2005)). The Ninth Circuit joined the First, Second, Third, Fifth, and Seventh Circuits in so holding.
The Ninth Circuit further stated that in order “[f]or cautionary language accompanying a forward-looking portion of a mixed statement to be adequate under the PSLRA, that language must accurately convey appropriate, meaningful information about not only the forward-looking statement but also the non-forward-looking statement.” The court underscored that “[i]f the non-forward-looking statement is materially false or misleading, it is likely that no cautionary language—short of an outright admission of the false or misleading nature of the non-forward-looking statement—would be ‘sufficiently meaningful’ to qualify the statement for the safe harbor.”
[1] In Janus, 564 U.S. 135, the Supreme Court held that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Please click here to read our prior discussion of the Court’s decision in Janus.
[2] Under Rule 10b-5(a), it is unlawful to “employ any device, scheme, or artifice to defraud … in connection with the purchase or sale of any security.” Rule 10b-5(c) prohibits individuals and entities from “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person … in connection with the purchase or sale of any security.” Section 17(a)(1) renders it “unlawful for any person in the offer or sale of any securities … to employ any device, scheme, or artifice to defraud.”