Southern District Of New York Dismisses Claim That Underwriter Of Regulation A+ Offering Was A Seller Of Unregistered Securities, But Allows Securities Fraud Claim To Proceed Past The Pleading Stage
On April 11, 2019, Judge Denise Cote of the United States District Court for the Southern District of New York granted in part and denied in part an underwriter’s motion to dismiss a putative class action lawsuit filed against a financial and technological services company (the “Company”), its executives, and the lead underwriter (“Underwriter”) of the Company’s Regulation A+ (“Reg A+”) offering in 2017 (the “Offering”). In re Longfin Corp. Securities Class Action Litigation, 1:18-cv-02933 (DLC) (S.D.N.Y. Apr. 11, 2019). Reg A+ was created to exempt certain categories of offerings from registration requirements and is an alternative to a traditional initial public offering. Plaintiffs alleged that all defendants sold unregistered securities in violation of Section 12(a)(1) of the Securities Act of 1933 (“Securities Act”) in order to list on the NASDAQ, and committed fraud in violation of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and that certain of the individual defendants were liable under Section 20(a) of the Exchange Act and/or engaged in insider trading in violation of Section 20A of the Exchange Act. The gravamen of plaintiffs’ claims is that the Company fraudulently issued more than 400,000 Class A shares to 24 individuals for $0 consideration in order to meet the NASDAQ’s listing requirement that the Company has issued 1,000,000 publicly held shares. With respect to the Underwriter’s motion to dismiss, the Court dismissed the Securities Act claim, finding that it was not a “seller” of securities, but held that the Exchange Act claim could proceed because plaintiffs’ amended complaint adequately alleged, for the purpose of the motion to dismiss, the Underwriter’s knowledge and participation in a “scheme” under Rule 10b-5.
U.S. Chamber Of Commerce’s Institute Of Legal Reform Publishes Report On “Broken Securities Class Action System” And Proposes Reforms
On February 25, 2019, the U.S. Chamber of Commerce’s Institute of Legal Reform (the “ILR”) published a report entitled “Containing the Contagion: Proposals to Reform the Broken Securities Class Action System” (the “Report”). The Report describes various trends and problems affecting the securities class action system, which have led to the filing of securities cases “reaching levels not seen since before the enactment of the Private Securities Litigation Reform Act (PSLRA) in 1995.” According to the Report, the three main drivers of the steep increase in securities litigation filings are: (1) cases alleging misstatements in connection with M&A activity; (2) so-called “event-driven litigation,” whereby securities class actions are triggered by unexpected adverse events, such as fires, explosions, data breaches, and the like; and (3) the U.S. Supreme Court’s decision in Cyan Inc. v. Beaver County Employees Retirement Fund (138 S. Ct. 1061 (2018)), which confirmed that state courts retain non-removable (with limited exceptions) concurrent jurisdiction over Securities Act of 1933 class actions. The Report also describes perceived abuses and the need to curb such practices. Finally, the Report urges action from different parts of the federal government including the SEC, federal courts, and Congress, calling on each to do its part in curbing non-meritorious lawsuits that can ultimately harm investors and the U.S. capital markets system.CATEGORY: Securities Act