- Fifth Circuit Review of SEC and Nasdaq Rulemaking – The final quarter of 2023 did not produce as many securities fraud and fiduciary duty rulings as earlier this year, but what it lacked in quantity, it made up for in potential impact. In Alliance for Fair Board Recruitment v. SEC, a Fifth Circuit panel upheld the SEC’s approval of Nasdaq’s new board diversity rule that requires Nasdaq-listed companies to disclose the voluntary, self-identified gender, racial characteristics, and LGBTQ+ status of its directors, including an explanation if it did not have at least two diverse board members. Two weeks later, a different Fifth Circuit panel in Chamber of Commerce of USA v. SEC, struck down the SEC’s share repurchase (stock buyback) modernization rule that would have required public companies to disclose in quarterly and annual reports (1) day-to-day stock buyback data, (2) the rationale for stock buybacks, (3) the process used to determine the amount of stock buybacks, and (4) any policies relating to insider purchases and sales during a stock buyback. While both cases upheld constitutional challenges to these SEC approved rules, the Chamber of Commerce ruling vacated the stock buyback rule as arbitrary and capricious under the Administrative Procedure Act.
- Securities Fraud Cases – In Utah Retirement Systems v. McCollam, the Fifth Circuit affirmed the dismissal of securities fraud claims against Weatherford and some of its executives based on certain pre-bankruptcy statements for failure to allege a strong inference of scienter. In United States v. Greenlaw, the Court affirmed the convictions of United Development Funding executives for their involvement in a Ponzi-like scheme that used investor funds to pay bank loans and investor distributions. Finally, in Seybold v. Charter Communications, Inc., the Fifth Circuit affirmed dismissal of SOX whistleblower claims for failure to provide sufficient details to show (1) the whistleblower engaged in protected activity and (2) believed the company was violating securities laws.
Newsletters
We publish quarterly newsletters that summarize recent federal and state court decisions of interest to practitioners litigating securities and fiduciary duty claims in Texas.
We cover decisions from the United States Supreme Court, the United States Court of Appeals for the Fifth Circuit, all federal district courts in Texas, the Texas Supreme Court, and all Texas civil appellate courts. We share current issues of the newsletter with our clients and referring lawyers; older issues appear below. You are welcome to download them, but please note the limitations on their content and use in the disclosure at the end of each newsletter.
2023 – 3Q Newsletter
- Securities Fraud Cases – The Fifth Circuit affirmed the dismissal of securities fraud claims based on the five-year statute of repose and pleading deficiencies in Burback v. Brock. District courts wrestled with motions for class certification after the Supreme Court’s decision in Goldman Sachs confirmed that defendants have the opportunity to rebut the presumption of class-wide reliance by showing lack of price impact.
- SEC Enforcement Actions – In SEC v. Bowen, Judge Scholer granted a motion to dismiss §10(b) claims against one defendant arising out of the sale of working interests in Oklahoma wells. While the Court did not rule on defendant’s Janus argument that he was not a “maker” of any false statements, it ruled the SEC had not adequately pleaded claims with sufficient particularity.
- Shareholder Derivative Cases – In stockholder derivative litigation against Tesla’s directors based on toxic workplace allegations, (In re Tesla, Inc. Stockholder Derivative Litigation) Judge Ezra adopted the magistrate’s recommendation to dismiss for failure to establish that 50% or more of the board were independent of Elon Musk or faced a substantial likelihood of liability. In Sobel on Behal of SolarWinds Corp. v. Thompson, Judge Pitman granted a motion to dismiss on forum non conveniens grounds based on an exclusive forum provision in the Company’s certificate of incorporation requiring derivative litigation to be filed in the Delaware Court of Chancery. Although the Fifth Circuit has not yet ruled on this issue, Judge Pitman followed the majority of Circuit Courts upholding such provisions even when the plaintiff asserts federal claims under the Exchange Act.
2023 – 2Q Newsletter
- SEC Enforcement Actions – Two decisions are likely to impact future SEC enforcement actions. In Axon Enterprise, Inc. v. FTC, the Supreme Court held in a 9-0 decision that constitutional challenges to SEC administrative enforcement actions may be filed directly in federal district courts without first objecting in the ALJ proceedings. In SEC v. Barton, the Fifth Circuit clarified what the SEC must establish to impose a receivership when no injunction prohibiting asset disposal is in place; it also confirmed that the SEC must trace ill-gotten gains to specific entities before placing them in receivership but can move for a temporary freeze before tracing is complete.
- Securities Fraud and RICO Cases – In Slack Technologies, LLC v. Pirani, a unanimous Supreme Court confirmed that when registered and unregistered shares are sold contemporaneously, a plaintiff in a §11 case must still plead and prove the securities he purchased were traceable to an allegedly misleading registration statement. In Yegiazaryan v. Smagin, the Supreme Court rejected a bright-line rule barring foreign plaintiffs from pursuing civil RICO claims if their injuries arose in the United States. Finally, Texas federal district courts denied motions to dismiss in three recent cases: Alta Mesa (denying motion to dismiss opt-out cases); Cassava Sciences (denying motions to dismiss putative class case); and Concho Resources (denying motion to dismiss claims against all but two individual defendants).
- Texas-Specific Rulings – In Abdullah v. Paxton, the Fifth Circuit ruled that a participant in two Texas retirement plans lacked standing to challenge state legislation requiring the plans to divest from pro-BDS companies. In Munro v. Jagpal, the Dallas Court of Appeals reinstated a dispute over majority ownership of a cannabis company that had been dismissed on forum non conveniens grounds.
- New Texas Business Courts – A new Texas law creates specialized business courts with appointed judges and concurrent jurisdiction over shareholder derivative litigation, securities class actions filed in state courts, and certain high-dollar commercial disputes. The new law is expected to face legal challenges but will otherwise take effect on September 1, 2024.
2023 – 1Q Newsletter
- Securities Fraud Class Actions – The Fifth Circuit reversed the dismissal of the Six Flags securities litigation, holding that the trial court overly discounted the allegations based on confidential witness statements. The Court reaffirmed that confidential witness allegations must be discounted but ruled that a single confidential witness with a “unique and significant corporate title,” who alleges facts in “convincing detail,” and is in a position to know facts firsthand requires only “minimal discounting.” Reviewing alleged misrepresentations that defendants claimed were forward-looking statements protected by the PSLRA safe harbor, the court found that some of the statements that referred to the current progress of construction projects were “mixed present/future” statements that were not protected by the safe harbor. As to other forward-looking statements that were not accompanied by any meaningful cautionary language, the Court found that plaintiffs adequately alleged “actual knowledge” of falsity. In the Nobilis Health Corp. securities litigation, the Fifth Circuit affirmed the denial of plaintiff’s motion for judgment under Rule 60(b). The trial court previously granted defendants’ motion to dismiss, which was affirmed in a prior appeal. While the appeal was pending, Plaintiff filed a motion for judgment under Rule 60(b), claiming that allegations in a related complaint filed by a third party demonstrated scienter. These allegations, the Court held, were insufficient.
The magistrate judge in the Concho Resources securities litigation recommended denial of the motion to dismiss, finding that plaintiffs adequately alleged that defendants made false statements regarding the company’s transition to “large scale development” or “manufacturing mode” in the Permian Basin. The Court in the First Cash Holdings securities litigation granted defendants’ motion to dismiss, finding that although plaintiffs pled some false statements regarding their auditors’ failure to focus on compliance with the Military Lending Act, plaintiffs failed to adequately allege scienter or loss causation. Because plaintiffs failed to allege motive to commit fraud, they were required to demonstrate a higher level of scienter, namely severe recklessness. In the Cassava Sciences securities litigation, the Court denied plaintiffs’ motion to lift the PSLRA discovery stay in order to obtain documents that the company had produced to the SEC in connection with an SEC civil action that was in the midst of settling. The Court found that plaintiffs failed to demonstrate any prejudice, other than the delay in obtaining discovery that is inherent in the automatic stay. - SEC Enforcement Actions – The Fifth Circuit affirmed disgorgement awards in two SEC enforcement actions where the awards approximated defendants’ unjust enrichment after deducting legitimate business expenses and reiterated that trial courts are not required to hold evidentiary hearings at the remedy phase where the defendant has consented to liability and disgorgement. See SEC v. Voight and SEC v. Team Resources, Inc. In SEC v. Reliable One Resources, the district court rejected the SEC’s argument that it was not required to show irreparable harm in order to obtain a TRO but found that the SEC’s showing of harm to the investing public was sufficient to support a TRO. In SEC v. Stack, the court entered an award of disgorgement, civil penalties, and an industry bar after defendant had consented to liability.
- Other Cases – In a case arising from the Stanford Financial receivership proceeding, the district court held that Texas law does not recognize a claim for aiding and abetting breach of fiduciary duty. Turk v. Pershing LLC. Texas does, however, recognize a claim for “knowing participation in breach of fiduciary duty.” The court found that there was sufficient evidence to create a material fact issue whether Stanford Financial’s clearing broker, Pershing LLC, knowingly participated in Stanford Financial’s breach of fiduciary duty and aided and abetted Stanford Financial’s TSA violations where Pershing provided additional services beyond merely acting as a clearing broker, and Pershing personnel noted the risks of doing business with Stanford Financial. In a 2-1 decision, the Fourteenth Court of Appeals affirmed the dismissal of a shareholder derivative case on demand futility grounds because plaintiff failed to adequately allege how the director defendant personally benefitted from the acts that plaintiff claimed were improper. Condon v. Kadakia.