Last year proved to be an active year for securities cases. The most anticipated decision of 2014, Halliburton v. Erica P. John Fund, provided the U.S. Supreme Court with the opportunity to overturn the fraud on the market presumption articulated in Basic v. Levinson. Instead the Court left the presumption intact. Of note, however, is the Court’s finding that defendants can, at the preliminary class certification stage, rebut this presumption by demonstrating that the alleged misrepresentation did not actually affect the stock price. For more information, please see our June 23, 2014, legal alert.

In contrast to the anticlimactic Halliburton, the Second Circuit in December provided what is likely the most important securities opinion of 2014, U.S. v. Todd Newman, et al., in which it reversed the Southern District of New York’s insider trading convictions of two investment portfolio managers. Critically, Newman 1) bolsters the requirement of a true quid pro quo arrangement—beyond mere friendship, and 2) requires that the tippee know that the tipper/insider received personal gain from the breach of his fiduciary duty. The court held that tippee “liability derives only from the tipper’s breach of a fiduciary duty, not from trading on material, non-public information.”

The court further explained that “the corporate insider has committed no breach of fiduciary duty unless he receives a personal benefit in exchange for the disclosure . . . , [and that] even in the presence of a tipper’s breach, a tippee is liable only if he knows or should have known of the breach.” Newman seems destined for Supreme Court review, as it calls into question dozens of recent insider trading convictions and threatens hundreds more pending and future investigations and prosecutions. Until then, however, insider trading defendants have gained two potentially powerful new defenses.

Another significant decision of 2014, Chadbourne & Parke LLP v. Troice, opened the door for potential broad liability from securities fraud class actions under state law. In Chadbourne, the Supreme Court narrowly read the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to allow securities fraud class actions based on state law to proceed where the misrepresentation or omission is “material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” For more information, please see our March 6, 2014, legal alert.

Last year also saw a unanimous Supreme Court hold, in Fifth Third Bancorp v. Dudenhoeffer, that fiduciaries of employee stock ownership plans are not entitled to any presumption of prudence when facing Employee Retirement Income Security Act of 1974 (ERISA) stock drop lawsuits alleging breach of fiduciary duty. Although this ruling eliminates the so-called Moench presumption, it also establishes a framework for pleading stock drop claims that sets a high bar for what is required to establish a breach of fiduciary duty under ERISA. For more information, please see our June 27, 2014 legal alert.

Delaware’s Supreme Court also handed down several notable decisions in 2014. In Kahn, et al. v. M&F Worldwide Corp., et al., the court adopted the business judgment rule—rather than the entire fairness standard—in controlling stockholder freeze-out mergers where the merger is conditioned on (1) the approval of a special committee of independent directors; and (2) the approval of a majority of unaffiliated minority stockholders. For more information, please see our March 20, 2014 legal alert. A few months later, in an en banc decision in ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., the court upheld provisions in Delaware non-stock corporation bylaws requiring that any member who sues the corporation and “does not obtain a judgment on the merits that substantially achieves . . . the full remedy sought” must reimburse the corporation for all litigation costs.

The court found that nothing in the Delaware General Corporation Law (DGCL) prohibits fee shifting, and because bylaws are “contracts among a corporation’s shareholders,” such a provision constitutes an exception to the American Rule, which otherwise requires that parties pay their own attorneys’ fees. The court cautioned that otherwise facially valid bylaws used for inequitable purposes will not be enforced, but noted that in general, bylaws are presumed valid. Many have expressed grave concerns about this opinion’s potential chilling effect on merger litigation, and the Delaware Senate is considering an amendment to the DGCL prohibiting such bylaws. It is unclear whether this holding will apply to public companies.

Finally, in December, in C&J Energy Services, Inc. v. City of Miami General Employees' and Sanitation Employees' Retirement Trust, the Delaware Supreme Court reversed a Court of Chancery decision requiring a target company to solicit alternative transactions for 30 days despite the merger agreement’s prohibition against such solicitation. The merger was unusually structured such that C&J would acquire a subsidiary of Nabors, and Nabors would retain a majority of the surviving company’s equity. Although it was the buyer, C&J negotiated for a “fiduciary out” that allowed it to accept a superior proposal during the passive market check. The Supreme Court’s decision explains that in a change of control sale, Revlon and its progeny require only an effective (and not active) market check.

The court also held that there is “no specific route that a board must follow” to fulfill its fiduciary duties, and it may rely on its business judgment in deciding whether to enter into a strategic transaction. The decision highlights a board’s flexibility under Revlon to fashion a reasonable sale process and the court’s reluctance to rewrite a prenegotiated agreement, especially where there is no finding that a third party aided and abetted any breach of fiduciary duty.

A handful of other circuit court decisions and petitions to the U.S. Supreme Court also deserve attention. In Bricklayers & Trowel Trades International Pension Fund v. Credit Suisse First Boston, the U.S. Court of Appeals for the First Circuit held that the district court properly excluded expert testimony on loss causation grounds. Bricklayers concerned a shareholder class action alleging that CSFB had “fraudulently withheld relevant information from the market in its reporting on the AOL-Time Warner merger.” To establish loss causation, plaintiffs relied upon an economic expert’s event study. The district court ultimately held the study inadmissible as unreliable under Daubert and, alternatively, that even if admissible, the study would not raise a triable issue of fact on loss causation. The First Circuit affirmed the district court’s holding, finding, among other reasons, that plaintiffs’ economic expert had failed to sort through confounding factors, instead “confounding information without any methodological underpinning.” The First Circuit was also highly critical of the expert’s selection of event dates, finding many were unrelated to the allegations in the complaint.

In June, in a highly anticipated but not surprising opinion, the Second Circuit, in SEC v. Citigroup Global Markets, Inc., held that Judge Jed Rakoff of the Southern District of New York abused his discretion and applied an incorrect legal standard in refusing to approve a settlement and consent decree between the SEC and Citigroup. Judge Rakoff’s chief basis for refusing to approve the original settlement was the inclusion of fairly boilerplate settlement language that Citigroup neither admitted nor denied liability for the conduct alleged. The court explained that the deference standard for the district court to apply in SEC enforcement actions is whether “the proposed consent decree is fair and reasonable,” and that “the public interest not be disserved.” The court further explained that the assessment of the adequacy of the agreement is not an element of this standard and emphasized that the “job of determining whether the proposed SEC consent decree best serves the public interest[] rests squarely with the SEC[.]” Citigroup assures parties who enter into settlement agreements with the SEC that they will not face the uncertainty created by Judge Rakoff’s prior rejection.

In March, the Supreme Court granted certiorari in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund. In Omnicare, plaintiffs are investors who purchased Omnicare securities and allege that Omnicare made statements in its 2005 registration statement that materially misled or omitted material information because it was engaged in illegal activities. The alleged activities included kickback agreements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid. Creating a split with the Second and Ninth Circuits, the Sixth Circuit held that plaintiffs did not need to plead that Omnicare had knowledge of falsity under Section 11 of the Securities Act of 1933.

The issue now before the Supreme Court is whether, to survive a motion to dismiss, it is sufficient for a plaintiff alleging a claim under Section 11 to demonstrate that a statement of opinion was objectively false (the statement was untrue), or whether the plaintiff must additionally allege that the statement was subjectively false (that the defendant did not believe the statement at the time the it was made). Given that the vast majority of securities suits are filed in the Second and Ninth Circuits, and these two circuits frequently dismiss Section 11 suits on the basis of absence of allegations of knowledge of falsity, Omnicare is significant. The case’s outcome will also affect the potential liability of stock issuers in public offerings and could potentially affect underwriters’ willingness to finance securities. Oral argument in this matter was held on November 2, 2014.

The Supreme Court also granted certiorari in Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., but later dismissed the case. The Court found certiorari had been “improvidently granted,” following a proposed settlement of the underlying class action. This leaves unresolved a circuit split on whether the filing of a class action tolls the statute of repose applicable to claims brought under the Securities Act of 1933.

Last year also brought increased activity by the SEC in the municipal securities issuers area, with the agency’s launch of the Municipal Continuing Disclosure Compliance (MCDC) Initiative. For more information, please see “2014 Year in Review: SEC Municipal Market Enforcement,” or our past legal alerts on the MCDC Initiative.

With the imminent Omnicare decision and the Delaware Senate’s imminent vote on a proposed amendment to prohibit fee-shifting bylaws, 2015 is certain to be another active year in the securities litigation arena. Ballard Spahr will continue to keep you apprised of these cases throughout the year.

Attorneys in Ballard Spahr’s Securities Enforcement and Litigation Group advise companies and their officers and directors on every type of securities and corporate governance claim, from regulatory investigations to derivative lawsuits and shareholder class actions. For more information, please contact please contact M. Norman Goldberger at 215.864.8850 or, or Andrew E. Kampf at 215.864.8323 or

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