Securities Litigation

On April 21, 2022, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal by the United States District Court for the District of Maryland of allegations that Marriott International had violated federal securities laws by omitting from its public filings material information pertaining to cybersecurity vulnerabilities.[1]  This blog post examines the facts underlying the decision and the holding’s implications for comparable securities fraud claims.

A pair of recent legal developments cast doubt on the long term ability of the Securities and Exchange Commission (“SEC”) to try contested actions before the agency’s in-house administrative law judges (“ALJ”).  First, the Supreme Court accepted a petition to hear the matter of SEC v. Cochran, Petition No. 21-1239, which concerns whether the SEC’s ALJs are unconstitutionally protected from removal. Second, the U.S. Court of Appeals for the Fifth Circuit issued an opinion holding that (1) a respondent in an SEC administrative proceeding was deprived of his right to a jury trial; (2) that Congress unconstitutionally delegated legislative powers to the SEC by failing to provide it with an intelligible principle by which to exercise its delegated power, and (3) that the administrative law judges were unconstitutionally protected from removal. These developments could have long term implications not only for the SEC, but for all federal administrative agencies.

On March 28, 2022, the Securities and Exchange Commission announced proposed changes to Exchange Act Rules that would expand the scope of which market participants the SEC considers to be a “dealer” or “government securities dealer.” Most investors would notice no change in their portfolio management practices.  But for certain high-frequency trading operations, the new rules might lead to substantial changes.

NFTs, or “non-fungible tokens,” are in the headlines.  Artists, politicians, and celebrities, along with everyday internet users, have been selling and trading various forms of the digital asset, sometimes earning millions of dollars from the sales.  But how do NFTs fit into the current securities regulation framework?  And what are the legal implications of participating in this new and volatile market?  This blog post explores these issues and analyzes ongoing NFT-related litigation.

The full-scale invasion of Ukraine by a revanchist Russia continues to dominate headlines as the war enters its second month. While the sometimes-terrible choices facing those living in the conflict zone are unparalleled, investors around the world also have choices to make. Among those, ESG funds that are tasked with minimizing investment risks associated with environmental, social and governance issues find themselves with difficult – and sometimes contradictory – dilemmas.

On June 29, 2021, a major cryptocurrency exchange (the “Crypto Exchange”) announced a new program called “Lend” in which it proposed offering customers a 4% interest rate on cryptocurrency tied to USD.[i] But on September 7, 2021, the Crypto Exchange announced that the U.S. Securities and Exchange Commission (the “SEC”) had issued a Wells notice, a formal notice that the agency was planning to sue them for offering the program.[ii] While the Crypto Exchange took the position that it was unclear why the SEC had issued this notice, it was evident from public comments that the SEC had been contemplating whether investment cryptocurrency programs should be classified as securities.[iii]  On September 20, 2022, the Crypto Exchange announced that it was dropping its Lend program.

On June 21, 2021, the Supreme Court issued an opinion by Justice Barrett on the reliance element of a securities fraud claim.[1]  In a unanimous portion of her opinion (the “Decision”), Justice Barrett held that courts may consider the generic nature of an alleged misrepresentation in determining whether the misrepresentation impacted share price at the class certification stage.  Of potentially greater significance, Justice Barrett also held, over a dissent by Justice Gorsuch (joined by Justices Thomas and Alito), that defendants bear the burden of persuasion by a preponderance of the evidence that an alleged misrepresentation has not had an impact on the price of a security.  This second holding will facilitate the formation of classes under Rule 23 of the Federal Rules of Civil Procedure by making it at least marginally easier for putative classes to demonstrate reliance through evidence common to the class, which in turn will help the class satisfy Rule 23’s predominance requirement.

In this post, we will summarize the Decision, discuss the caselaw interpreting it to date, and offer concluding thoughts on its potential impact on the practice of securities litigation.

A key question for any company considering the issuance of cryptocurrency is whether that digital asset will be treated by regulators as a security, like BP stock, or a commodity, like Bitcoin.[i]  In 2019, the Securities and Exchange Commission (the “SEC” or the “Commission”) provided guidance on this issue in a “Framework for ‘Investment Contract’ Analysis of Digital Assets” (“Framework”).[ii]   The Framework lists characteristics that make it more or less likely that the SEC will deem a given cryptocurrency to be a security.  The SEC’s enforcement action against Ripple Labs (“Ripple”) for the sale of a digital asset named “XRP,” filed in December 2020 and currently pending before the U.S. District Court, Southern District of New York, illustrates the manner in which the SEC has applied the Framework, and serves as an early test of whether courts agree with the SEC’s broad view of the investment contract analysis with respect to crypto assets.

On November 18, 2021, the Securities and Exchange Commission (the “Commission”) released its Enforcement Results for fiscal year (“FY”) 2021, which spans from October 1, 2020 to September 30, 2021.  The Commission published its results in an abbreviated press-release format with an accompanying addendum, foregoing the more formal annual report format it used in prior years.  Gurbir S. Grewal, who was appointed Director of the Commission’s Division of Enforcement (the “Division”) in July 2021, emphasized a commitment to innovation.  Grewal stated the Division brought “a number of critically important and first-of-their-kind enforcement actions,” and accomplished “record-breaking achievements” for its whistleblower program.  This blog post will review some of the key takeaways, as well as offer predictions for enforcement trends in FY 2022.

Last summer, Representative Alexandria Ocasio-Cortez (D-NY) introduced bill H.R. 4620 to limit the exemption from registration requirements applicable to certain family offices under the Investment Advisers Act of 1940 (the “Advisers Act”).  If the bill becomes law, among other things, a family office with $750,000,000 or more in assets under management will no longer be exempt from registration under the Advisers Act.