Publications

(Article from Securities Law Alert, Year in Review 2021) 

For more information, please visit the Securities Law Alert Resource Center

Second Circuit: Bank’s Failure to Disclose Money Laundering Suspicions Not Actionable As There Was No Obligation to Self-Report

On August 25, 2021, the Second Circuit affirmed the dismissal of a putative securities fraud class action alleging that a bank’s financial statements were misleading under Section 10(b) of the Exchange Act because they incorporated revenue from money laundering but failed to simultaneously disclose what the bank knew about possible money laundering at one branch. Plumber & Steamfitters Local 773 Pension Fund v. Danske Bank, 11 F.4th 90 (2d Cir. 2021) (Jacobs, J.). The court pointed out that plaintiffs did not allege that the financial numbers were manipulated in any way, only that defendants failed to simultaneously disclose the anti-money laundering issues. The court held that “because [the bank] was under no obligation to self-report its growing suspicions regarding those issues, its disclosure of accurate historical data, standing alone, is not actionable.”

The court stated that “companies do not have a duty to disclose uncharged, unadjudicated wrongdoing.” The court further explained that “[a]s a corollary of that rule, accurately reported financial statements do not automatically become misleading by virtue of the company’s nondisclosure of suspected misconduct that may have contributed to the financial results.”

In support of its conclusion that the bank’s disclosure of accurate historical data was not actionable because it was under no obligation to self-report, the court reasoned that otherwise every company whose quarterly financial reports included revenue from transactions that violated anti-money laundering regulations could be sued for securities fraud. The court thus affirmed the district court, concluding that plaintiffs’ “allegations do not move the claims outside the realm of corporate mismanagement and into the realm of securities fraud.”

Ninth Circuit: Projected Timelines Concerning a New Product Are Forward-Looking Statements

On January 26, 2021, the Ninth Circuit affirmed the dismissal with prejudice of a putative securities fraud class action alleging that a car company and two of its officers misled investors about the company’s progress in building production capacity for its first mass-market electric vehicle. Wochos v. Tesla, 985 F.3d 1180 (9th Cir. 2021) (Collins, J.). The court held that none of the 15 statements at issue were actionable as they were protected as forward-looking statements under the Private Securities Litigation Reform Act (“PSLRA”), or to the limited extent that they were not so protected plaintiffs failed to adequately plead falsity.

Plaintiffs alleged that the company announced production goals for its new vehicle for “the end of 2017 that it knew it would not be able to achieve, and it repeatedly reaffirmed that it was on track to reach those targets, even as the end-of-the-year deadline drew closer and as delays grew increasingly significant.” With respect to the PSLRA’s safe harbor for forward-looking statements, the court found that the company’s “goal to produce 5,000 vehicles per week is unquestionably a forward-looking statement under § 21E, because it is a plan or objective of management for future operations, and this plan or objective relates to the products of [the company].”

The court further found that “[the company’s] various statements that it was on track to achieve this goal and that there are no issues that would prevent [the company] from achieving the goal are likewise forward-looking statements.” The court reasoned that “[b]ecause any announced objective for future operations necessarily reflects an implicit assertion that the goal is achievable based on current circumstances, an unadorned statement that a company is on track to achieve an announced objective, or a simple statement that a company knows of no issues that would make a goal impossible to achieve, are merely alternative ways of declaring or reaffirming the objective itself.” The court pointed out that “[t]he statutory safe harbor would cease to exist if it could be defeated simply by showing that a statement has the sort of features that are inherent in any forward-looking statement.”

The court stated that “statements of the assumptions underlying or relating to a declared objective are also deemed to be forward-looking statements.” The court determined that “[t]his reasoning precludes [p]laintiffs’ theory that [the company’s] year-end goal rested on scheduling assumptions that [the company] knew it was unlikely to meet.” The court concluded that “[a]ny such schedule about how future production would play out on the way toward the announced goal is simply a set of the assumptions about future events on which that goal is based.” The court continued, stating that “[l]ike the goal itself, such projected timelines are forward-looking statements.”

Ninth Circuit: Applies Omnicare Standard to Pleading Falsity of Opinion in Section 14(a) Claims

On April 20, 2021, the Ninth Circuit affirmed the dismissal of a putative securities class action alleging misrepresentations of fact and omissions in a proxy statement used to secure shareholder approval for the sale of the defendant company in violation of Section 14(a), Section 20(a), and Rule 14a-9. Golub v. Gigamon, 994 F.3d 1102 (9th Cir. 2021) (Wardlaw, J.). Plaintiff alleged that these misrepresentations of fact and omissions made certain statements of opinion in the proxy statement false or misleading. The court held that it would apply the standards for actionability for falsity under Section 11 explained in Omnicare v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015), to falsity of a statement of opinion under SEC Rule 14a-9 through either a misrepresentation-of-material-fact theory or an omission-of-material-fact theory.

The court explained that Rule 14a-9 prohibits any statement which, under the circumstances, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements not false or misleading. The court further explained that despite Rule 14a-9’s use of the word “fact” it also permits “a plaintiff to plead and prove false the ‘statements of reasons, opinions, or beliefs’ of a company’s directors[.]” (quoting Va. Bankshares v. Sandberg, 501 U.S. 1083 (1991)).

The court pointed out that the Ninth Circuit has not addressed how Omnicare affects claims alleging falsity of an opinion under Rule 14a-9. The court explained that in Omnicare, “the Supreme Court examined the standards for alleging falsity of an opinion under [S]ection 11[.]” The Ninth Circuit then referenced its decision in Wochos v. Tesla, 985 F.3d 1180 (9th Cir. 2021), which discussed Omnicare and summarized the three ways[1] that “a statement of opinion may nonetheless involve a representation of material fact that, if that representation is false or misleading, could be actionable.” Citing Wochos, the court explained that “[s]uch a statement could potentially give rise to liability under an omission theory if the facts conveyed in that fashion are untrue, as would be apparent based on a more fulsome disclosure.”

The court held “that Omnicare’s standards for pleading falsity of opinion—via either a misleading representation or omission—apply to claims arising under [S]ection 14(a), as implemented by Rule 14a-9.”

The Ninth Circuit summarily dealt with plaintiff’s allegations in a separate unpublished memorandum concluding that, with respect to the alleged misrepresentations and omissions in connection with statements of opinion, plaintiff failed to allege falsity or to overcome the PSLRA’s safe harbor. See Golub v. Gigamon, No. 19-16975, 847 F. App’x 368 (9th Cir. 2021).

Ninth Circuit: Affirmative Misrepresentation Allegations “Push” Mixed Securities Fraud Case Outside of Affiliated Ute’s Presumption of Reliance

On June 25, 2021, the Ninth Circuit reversed the denial of summary judgment to a defendant auto manufacturer in a putative securities fraud class action alleging that defendant made omissions and affirmative misrepresentations in offering memoranda relating to its secret use of defeat devices in its vehicles to hide unlawfully high emissions. In re Volkswagen “Clean Diesel” Mktg., Sales Pracs., & Prods. Liab. Litig., 2 F.4th 1199 (9th Cir. 2021) (Smith, J.). The Ninth Circuit held that the presumption of reliance established by Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), did not apply because plaintiff’s allegations could not be characterized “primarily” as claims of omission. The Ninth Circuit remanded the case to the district court to further consider whether a triable issue of material fact exists.

In Affiliated Ute, the Supreme Court established the presumption of reliance in a case where plaintiff stockholders alleged “primarily a failure to disclose.” The Court reasoned that if the stockholders were required to affirmatively prove reliance they “would have been forced to prove a speculative negative: that they would have relied on information about the secondary market before selling their stock had the bank disclosed it.” Subsequently, in Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999), the Ninth Circuit held that the “presumption should not be applied to cases that allege both misstatements and omissions unless the case can be characterized as one that primarily alleges omissions.”

After acknowledging that plaintiff alleged an overarching omission (defendant did not disclose for years that it was secretly installing defeat devices), the Ninth Circuit pointed out that plaintiff also alleged “more than nine pages of affirmative misrepresentations that were made by [defendant] and relied upon by Plaintiff and its investment advisor.” The court observed that plaintiff “does not face the difficult or impossible task of proving a speculative negative.” The Ninth Circuit concluded that while this is a mixed case, plaintiff’s “allegations cannot be characterized primarily as claims of omission, so the Affiliated Ute presumption of reliance does not apply.” The court determined that “[t]hese affirmative misrepresentations . . . push this case outside Affiliated Ute’s narrow presumption.” The Ninth Circuit explained that to hold otherwise would make the presumption available for all securities fraud claims “because all misrepresentations can be cast as omissions, at least to the extent they fail to disclose which facts are not true.”

Ninth Circuit: Plaintiff Who Purchased Shares in a Direct Listing Has Standing Under Section 11 and Section 12(a)(2) Regardless of Whether Shares Were Registered or Unregistered

On September 20, 2021, the Ninth Circuit affirmed a ruling that a stockholder who purchased shares of a company that went public through a direct listing had standing under Section 11 and Section 12(a)(2) of the Securities Act even though he could not determine if he had purchased registered or unregistered shares in the direct listing. Pirani v. Slack Techs., 13 F.4th 940 (9th Cir. 2021) (Restani, J.). The court held that plaintiff had standing because his shares “could not be purchased without the issuance of [the company’s] registration statement, thus demarking these shares, whether registered or unregistered, as ‘such security’ under Sections 11 and 12 of the Securities Act.”

Noting that this was a case of first impression, the court framed the issue as “what does ‘such security’ mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement[.]” Section 11 of the Securities Act states, “In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not mis-leading, any person acquiring such security . . . may, either at law or in equity, in any court of competent jurisdiction, sue—(1) every person who signed the registration statement . . . .” 15 U.S.C. § 77k(a). The court explained that under the NYSE’s direct listing rule[2] a company must file a registration statement in order to engage in a direct listing. The court continued that the SEC “interprets this reference to a registration statement in the rule as an effective registration statement filed pursuant to the Securities Act of 1933.” The court then noted that with a direct listing—as opposed to an IPO—both registered and unregistered shares are immediately sold to the public at the time of the effectiveness of the registration statement, and the same registration statement makes it possible to sell both types of shares.

The court determined that the company’s “unregistered shares sold in a direct listing are ‘such securities’ within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence.” As there was only one registration statement here, the court stated that all of the stock sold in this direct listing, whether labeled as registered or unregistered, was traceable to that one registration. The court determined that plaintiff pled facts sufficient to establish standing under Section 11 and affirmed the denial of dismissal. Separately, the court stated that “Section 12 liability (resulting from a false prospectus) is consistent with Section 11 liability (resulting from a false registration statement).” Accordingly, the court found that plaintiff also had statutory standing under Section 12(a)(2).