Northern District Of California Holds That SPAC Investors Have Standing To Sue Regarding Alleged Misstatements About A Different Entity, But Dismisses Putative Class Action For Failure To Allege Material Misstatements
On January 11, 2023, the United States District Court for the Northern District of California dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) against an electric vehicle company and its CEO. In re CCIV/Lucid Motors Sec. Litig., No. 4:21-cv-9323, slip op. (N.D. Cal. Jan. 11, 2023), ECF No. 151. Plaintiffs, who allegedly purchased shares in a Special Purpose Acquisition Company (“SPAC”) that later merged with the electric vehicle company (with the electric vehicle company becoming the surviving entity of the merger), alleged that, prior to the merger, the company had made misrepresentations and omissions about its value. Plaintiffs claimed to have invested in the SPAC after the press had announced the SPAC was “in talks” with the electric vehicle company, but before the merger was officially announced by the SPAC and the company themselves. Following post-merger statements that allegedly contradicted the company’s pre-merger statements, plaintiffs sued, claiming that defendants’ alleged misrepresentations regarding the electric vehicle company’s value had caused them to pay an inflated price for the SPAC’s stock. The Court held that plaintiffs had standing to sue the electric vehicle company, but dismissed their claims for failure to identify any material misrepresentations because the challenged statements were made before the SPAC and the electric vehicle company had announced or confirmed that they were in merger discussions.
The United States Supreme Court Will Hear Case Presenting Question Of Whether Investors Have Standing To Bring Securities Act Claims In Connection With Shares They Cannot Prove Were Registered Under The Registration Statement They Allege Is False Or Misleading, Such As Shares Purchased Through Direct Listings
On December 13, 2022, the United States Supreme Court granted a petition for certiorari to review a split decision by the Ninth Circuit holding that plaintiff-investors had standing under the Securities Act of 1933 (the “Securities Act”) to sue a workplace communication software company (the “Company”) based on shares purchased through a direct listing. Slack Technologies, LLC, et al., v Fiyyaz Pirani, No. 22-200 (U.S. Dec. 13, 2022). The issue before the Supreme Court is whether Sections 11 and 12(a)(2) of the Securities Act require plaintiffs to plead and prove that they bought shares that were registered under the registration statement they claim was misleading.
Second Circuit Affirms Dismissal Of Exchange Act Claims Against Acquired Public Company, Holding That Shareholders Of An M&A Acquiror Do Not Have Standing To Pursue Claims Based On Acquired Company’s Alleged Pre-Transaction Misstatements
On September 30, 2022, a panel of the United States Court of Appeals for the Second Circuit affirmed a decision of the United States District Court for the Southern District of New York dismissing a putative securities fraud class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder against a flavoring and fragrance products company (the “Company”) and several of its executives. Menora Mivtachim Ins. Ltd., et al. v. Frutarom Indus. Ltd., et al., No 21-1076 (2d Cir. Sept. 30, 2022). Plaintiffs alleged that, from 2002 to 2018, the Company engaged in a “long-running bribery scheme,” and that defendants made materially misleading statements about the Company’s compliance with anti-bribery laws and its business growth in public documents filed when the Company was acquired in 2018. The district court granted the motion to dismiss as against the Company and its officers, holding that plaintiffs failed to sufficiently allege statutory standing to pursue their securities fraud claims. The Second Circuit affirmed.
Ninth Circuit Affirms District Court’s Order Holding Plaintiff Had Standing To Sue Defendants Based On Shares Purchased Through Direct Listing
On September 20, 2021, the Ninth Circuit, in a split decision, held that plaintiff—a shareholder who allegedly purchased shares through a direct listing by a technology company (the “Company”)—had standing to bring claims under Sections 11, 12(a)(2), and 15(a) of the Securities Act of 1933 (the “Securities Act”). Fiyyaz Pirani v. Slack Technologies, Inc., et al, No. 20-16419 (9th Cir. Sept. 20, 2021). The Ninth Circuit affirmed the district court’s order denying in part a motion to dismiss securities fraud claims. The Company challenged plaintiff’s standing to sue under Sections 11 and 12(a)(2) of the Securities Act for failure to prove his shares were registered under the alleged misleading registration statement. The Court held that plaintiff had standing to bring Securities Act claims because, whether registered or unregistered, his shares could not have been purchased without the issuance of the Company’s registration statement. The Court concluded that the shares purchased by plaintiff were governed by Sections 11 and 12 of the Securities Act and affirmed the district court’s partial denial of the Company’s motion to dismiss.
U.S. Supreme Court Holds That ERISA Plan Participants Must Demonstrate Actual Or Imminent Risk Of Loss To Establish Article III Standing To Pursue Statutory Claims Regarding The Alleged Mismanagement Of Plan Funds
On June 1, 2020, the United States Supreme Court, in an opinion by Justice Kavanaugh and joined by Chief Justice Roberts and Justices Alito and Gorsuch, held that plaintiffs—participants of a defined-benefit pension plan—lacked Article III standing to seek restoration of alleged plan losses or injunctive relief, under the Employee Retirement Income Security Act of 1974 (“ERISA”), because they had no “concrete stake” in the lawsuit. Thole v. U.S. Bank, N.A., et al.,
No. 17-1712 (June 1, 2020). The case was on appeal from the Eighth Circuit, and was previously previewed in our weekly newsletter
at the beginning of this year. Plaintiffs alleged that the defined-benefit plan’s fiduciaries mismanaged the plan, causing about $750 million in losses. The Court affirmed the Eight Circuit’s dismissal of the case, after holding that, insofar as whether plaintiffs won or lost the outcome “would not change the plaintiffs’ monthly pension benefits” under their defined-benefit plan, they had not suffered any concrete injury sufficient to satisfy Article III standing.
California Appellate Court Holds Secondary Market Purchasers of ETFs Lack Standing To Bring Securities Act Claims
On January 23, 2020, the Court of Appeal of the First Appellate District of California affirmed a lower court’s judgment holding that investors lacked standing to pursue claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 against an open-end management investment company (the “Company”), its investment advisor, the investment advisor’s parent company, and certain members of the board of trustees of the Company. Jensen v. iShares Tr., 44 Cal. App. 5th 618 (Ct. App. 2020), review denied (May 27, 2020). Plaintiffs, who purchased shares of exchanged-traded funds (“ETFs”) on the secondary market, claimed that the Company failed to adequately disclose the risks associated with “flash crashes” that were known to occur in the ETF market. The Court affirmed the lower court’s dismissal, holding that plaintiffs lacked standing under Section 11 because they could not satisfy the tracing requirement and that plaintiffs lacked standing under Section 12(a)(2) because they failed to allege direct contract with defendants.
Northern District Of California Denies In Part Motion To Dismiss Securities Act Claims Against Software Company, Finding That Plaintiff Met Section 11 “Tracing” Requirements In Connection With Direct Listing Of Preexisting Shares
On April 21, 2020, Judge Susan Illston of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative class action lawsuit asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”) against a software company (the “Company”), certain of its executives and directors, and three venture capital firms (the “VC Defendants”) that held a significant percentage of the Company’s voting power. Fiyyaz Pirani v. Slack Technologies, Inc., et. al., No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020). Plaintiff alleged that defendants were liable for materially misleading statements and omissions concerning the Company’s service outages, competition, scalability, and growth strategy in offering materials in connection with the Company’s direct listing of preexisting shares to the public. The Court granted in part and denied in part defendants’ motion to dismiss, and granted plaintiff leave to amend to cure the amended complaint’s deficiencies.
Second Circuit Finds New Private Right Of Action Under Investment Company Act Of 1940
Rejecting a widely-held consensus, on August 5, 2019, the United States Court of Appeals for the Second Circuit held that Section 47(b)(2) of the Investment Company Act (“ICA”) creates an implied private right of action for rescission in favor of a party to a contract that allegedly violates the ICA (or whose performance allegedly violates the ICA). Oxford University Bank v. Lansuppe Feeder, Inc., No. 16-4061 (2d Cir. Aug. 5, 2019).
District Of Massachusetts Dismisses Putative Class Action For Lack Of Standing
On May 16, 2019, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts dismissed a putative class action against the medical device company ReWalk Robotics and certain of its officers and directors under the Securities Exchange Act of 1934 (“Exchange Act”). Yan v. ReWalk Robotics Ltd.
, No. 17 Civ. 10169 (D. Mass. May 16, 2019). As discussed in our prior post
, the Court previously dismissed, with prejudice, claims under the Securities Act of 1933 (“Securities Act”) related to an IPO registration statement for failure to identify a false or misleading statement in the registration statement. The Court also dismissed, for lack of standing, Exchange Act claims based on alleged post-IPO misstatements, because the sole lead plaintiff only purchased stock in the IPO. The prior dismissal of the Exchange Act claims, however, was without prejudice. The lead plaintiff then moved for leave to amend the complaint to add a plaintiff who purportedly had standing to bring the Exchange Act claims. The Court again held that plaintiff lacked standing, and further held that the lack of standing was fatal to the putative class action and could not be cured by amendment.
New York Federal Court Dismisses Charter School’s Section 10(b) Claims For Lack Of Standing, Rejecting Plaintiff’s Constructive Seller Theory
On April 10, 2019, Judge Loretta A. Preska of the United States District Court for the Southern District of New York dismissed an action asserting violations of Section 10(b) of the Securities and Exchange Act of 1934 and claims under state law against a broker-dealer (the “Broker-Dealer”) and several individuals who participated in a bond offering facilitated by the Broker-Dealer. Palm Beach Maritime Museum v. Hapoalim Sec. USA, Inc., 19 Civ. 908 (LAP), 2019 WL 1950139 (S.D.N.Y. Apr. 10, 2019). Plaintiff, a non-profit corporation approved as a charter school in Florida, alleged that defendants made materially false statements in connection with a bond purchase agreement to finance plaintiff’s purchase and expansion of property. The Court held that plaintiff lacked standing to pursue its Section 10(b) claim because it was not the buyer or seller of a security.
Middle District Of Pennsylvania Dismisses Putative Class Action Based On Lead Plaintiff’s Loss Of Standing
On October 24, 2018, Judge John E. Jones III of the United States District Court for the Middle District of Pennsylvania granted judgment on the pleadings and dismissed a putative securities class action against Rite Aid Corporation, Walgreens Boots Alliance, Inc., and certain of their executives under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder relating to the ultimately unsuccessful merger between the two companies. Hering v. Walgreens Boots Alliance, Inc.,
—F. Supp. 3d—, 2018 WL 5276189 (M.D. Pa. 2018). This decision follows from a decision issued earlier this summer and reviewed in a prior post
. In that earlier decision, Judge Jones dismissed claims with respect to Rite Aid’s statements and held that only Walgreens’ statements made after October 2016 were actionable. In its most recent decision, the Court held that, since the named plaintiff’s last alleged stock purchase predated October 2016, he no longer had standing. Further, the Court denied a motion to intervene filed by putative class members, but noted that the proposed intervenors were free to file their own actions.
In Action Asserting Parallel Securities Act And Exchange Act Claims, Massachusetts District Court Dismisses IPO-Based Securities Act Claims With Prejudice For Failure To Plead A Misstatement, And Post-IPO Exchange Act Claims Without Prejudice For Lack Of Standing
On August 23, 2018, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts dismissed the claims asserted in a putative class action against ReWalk Robotics and its officers, directors, and IPO underwriters under the Securities Act of 1933 (“Securities Act”) for misrepresentations made in a registration statement with prejudice, but dismissed the claims asserted under the Securities Exchange Act of 1934 (“Exchange Act”) for alleged post-IPO misstatements without prejudice. Yan v. ReWalk Robotics Ltd., No. 17 Civ. 10169, slip op. (D. Mass. Aug. 23, 2018), ECF No. 107.
Southern District Of New York Partially Denies Certification Of Putative Class Action Claims For Lack Of Class Standing
On March 22, 2018, Chief Judge Colleen McMahon of the United States District Court for the Southern District of New York granted in part and denied in part class certification in a putative class action alleging breach of contract claims against Citibank, N.A. Merryman et al. v. Citigroup Inc. et al.
, 15 Civ. 9185 (CM) (S.D.N.Y. Mar. 22, 2018). Plaintiffs, former holders of American Depositary Receipts (“ADRs”) in three separate companies, brought this putative class action on behalf of a proposed class who currently or previously held any of 35 separate ADRs for which defendant served as depositary bank. Plaintiffs alleged that defendant breached the contracts governing these ADRs by converting cash distributions received from foreign issuers at one foreign exchange rate and then supposedly using a less favorable rate when remitting the proceeds to ADR holders and retaining the difference (the “spread”). The Court granted class certification with respect to the securities previously owned by plaintiffs, but held that plaintiffs lacked class standing to bring claims on behalf of holders of other securities.
Second Circuit Affirms Dismissal Of Disgorgement Claim For Lack Of Standing Because Shares In Company Were Exchanged For Shares Of Parent Company Before Filing
On October 19, 2017, the United States Court of Appeals for the Second Circuit, in a summary order, affirmed dismissal of an action seeking disgorgement of alleged short-swing profits realized by Defendants Eminence Partners II, L.P. and related entities in connection with their sale of common stock in The Men’s Wearhouse, Inc. (“Men’s Wearhouse”) under Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78p(b). Morrison v. Eminence Partners II, LP
, No. 17-843 (2d Cir. Oct. 19, 2017). The Second Circuit held that plaintiff lacked standing under Section 16(b) because his shares of Men’s Wearhouse stock were exchanged for shares in its parent company, Tailored Brands, Inc. (“Tailored Brands”), in a corporate reorganization that was completed before the lawsuit was filed.
Northern District Of California Dismisses Securities Fraud Class Action, Finding Plaintiffs Had Alleged “Injury In Fact” Sufficient To Confer Standing But Failed To Plead Actual Loss With Particularity
On June 12, 2017, Judge Richard Seeborg of the United States District Court for the Northern District of California dismissed without prejudice a putative securities class action against Charles Schwab & Co. (“Schwab”) under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Crago v. Charles Schwab & Co., Inc.
, 2017 WL 2540577 (N.D. Cal. June 12, 2017). Plaintiffs, Schwab customers who placed trades through Schwab, alleged that Schwab’s stated commitment to securing best execution for its clients was false and misleading in light of Schwab’s bulk order routing through UBS Securities LLC (“UBS”), as a result of which plaintiffs allegedly suffered harm because they lost the opportunity for price improvement. The Court held that although plaintiffs had standing to pursue their claims, they had insufficiently alleged falsity, scienter, economic loss, loss causation and reliance, and granted leave to replead.
Northern District Of California Dismisses Securities Fraud Action Because Of Lack Of Facts Showing Statements Were Misleading When Made
On December 29, 2016, Judge Haywood S. Gilliam of the United States District Court for the Northern District of California dismissed a putative securities class action against Solazyme, Inc. (“Solazyme”), certain of its officers and directors, and the underwriters of two of its securities offerings. Norfolk Cty. Ret. Sys. v. Solazyme, Inc., et al.
, No. 15-cv-02938 (N.D. Ca. Dec. 29, 2016). Plaintiffs, investors who allegedly purchased Solazyme securities traceable to public offerings of notes and common stock that were both made on March 27, 2014, claimed that defendants made false statements about Solazyme’s oil production facility in Moema, Brazil (the “Moema Facility”), in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act”) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). The Court granted defendants’ motion to dismiss, in part, because plaintiffs failed to plead with particularity that the challenged statements were false or misleading at the time they were made.
Class Certification Granted In Securities Class Action Against Wal-Mart
On September 20, 2016, Judge Susan O. Hickey of the United States District Court for the Western District of Arkansas certified a class of investors in an action brought against Wal-Mart Stores Inc. for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. City of Pontiac General Employees’ Retirement System v. Wal-Mart Stores, Inc. et al.,
No. 5:12-cv-05162 (W.D. Ark. Sept. 20, 2016). The Court held that the proposed class met the numerosity, commonality, typicality, and adequacy of representation requirements under Rule 23 of the Federal Rules of Civil Procedures (“Rule 23”), and named the City of Pontiac General Employees’ Retirement System as class representative.
Southern District Of New York Partially Grants Motion To Dismiss Securities Claims In Virtus Investment Partners Securities Litigation
On July 1, 2016, Judge William Pauley III of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action concerning Virtus Investment Partners, the parent of an investment advisory company that managed and provided advice to mutual funds. See Youngers v. Virtus Inv. Partners Inc.
, No. 15-cv-8262 (S.D.N.Y. July 1, 2016). Plaintiffs purported to assert claims under Section 10(b) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the
Securities Act of 1933, on behalf of investors who purchased shares in certain Virtus mutual funds between May 8, 2010 and December 22, 2014. Plaintiffs’ allegations concerned statements in the funds’ registration statement that the above-market performance of the funds using a particular investment strategy (the “AlphaSector” strategy) was calculated based on live trading since 2001. Plaintiffs alleged that the pre-2008 returns were actually generated using only back-testing, as the algorithm was not developed until 2008.