New Developments in Securities Class Actions - acc.com · 4/25/2018 · •This despite the fact...

April 25, 2018 In-House Counsel Conference

NEW DEVELOPMENTS IN

SECURITIES CLASS ACTIONS

Presenters:

• Jeff Dailey – Partner, SEC Enforcement and Litigation, Akin Gump

• Kate Pytlewski – Interim General Counsel, EPAM Systems

• Robert Yellen - Executive Vice President, D&O and Fiduciary Liability Product

Leader, FINEX, Willis Towers Watson

Overview

• Securities class action trends.

• Behind the numbers.

• Understanding event driven securities litigation.

• Cost and effective defense considerations.

• Case Study: Merger Objection Litigation.

• Overview of the enforcement landscape.

Securities Claims Trends -Highlights

• Record pace of filings. Driven by continued increase in

merger objections.

• This despite the fact that number of public companies is down

significantly from 20 years ago.

• In 2017, likelihood of litigation for U.S. exchange listed

companies was greater than in any previous year.

• 1 in 15 S&P 500 companies sued in 2017. Industrials

sector most frequent target.

• Highest number of dismissals and lowest settlement value

since the early 2000s.

• NERA Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review.

• Cornersone Research Securities Class Action Filings: 2017 Year in Review

Securities Claims Trends (Con’t)
















Behind the Numbers

• Federal filings involving M&A doubled from 2016.

• Related to January 2016 Delaware Court of Chancery rejection of a

disclosure-only settlement in Zillow’s acquisition of Trulia.

• Smaller companies were more common targets of filings.

• Fewer settlements and more dismissals and withdrawals

relates to the quality of the cases being brought.

• Even frivolous cases remain expensive for issuers and distracting

for company management.

• Commentators suggest that the willingness to file low-

quality suits is tied to turnover in the plaintiffs’ bar.

Behind the Numbers – Emerging Areas

• Historically, securities class filings were driven by

accounting fraud cases, predicated on revenue

recognition, asset impairment and allowance estimates.

• New trend is toward cases built on adverse news.

• Some examples of this “Event Driven” securities litigation

include:

• Cyber Insecurity;

• Sexual harassment;

• Emissions disclosures;

• “Sales Culture”;

• Products causing cancer; and

• Drug trial failures.

Behind the Numbers - Evolution


Event Driven Securities Litigation (Con’t)

• “Cyber Insecurity” allegations, generally:

• Stock dropped after disclosure of either a data breach or alleged

data security vulnerability.

• Pre-breach public disclosures did not adequately disclose the risk

of a data security incident, or that the company overstated is cyber

security related strength or capabilities.

• Company withheld or was too slow in disclosing a breach after it

was detected.

• Examples of cases:

• Kuhns v. Equifax Inc.

• Ali v. Intel Corp.

• Kim v. Advanced Micro Devices, Inc.


• Securities or derivative breach of fiduciary duty claims

based on sexual harassment allegations, generally:

• Failure of company to address or disclose systematic culture of

sexual harassment.

• When disclosed, avalanche of lawsuits, fleeing talent, and damage

to good will.


• Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund

v. Hewlett-Packard Co. (Dismissal affirmed 1/19/17 by 9th Cir.).

• City of Monroe Employees’ Retirement System v. Ruper Murdoch

($90 million Settlement approved 2/9/18).

• Irving Firemen’s Relief & Retirement Fund v. Signet Jewelers Ltd.

Norfolk Country Retirement System v. Stephen Wynn


• Emissions disclosures allegations, generally:

• False or misleading statements made about development of

reduced emissions products.

• Claim breach of fiduciary duty and wasting of corporate assets.


• In Re Navistar Int’l ($9.1 million settlement)


• “Sales Culture” allegations, generally:

• Failure to disclose business practice of allowing and incentivizing

employees to add services to accounts without customer

permission.

• As a result, business was not sustainable and statements about

financial performance and prospects were false and misleading.


• In re Wells Fargo

• In re CenturyLink


• Allegations Regarding Products causing health risks.

• Hall v. Johnson and Johnson

• Case started with a Bloomberg report on the content of documents

unsealed in personal injury litigation, which plaintiffs argued showed that

the company knew for decades that its talc products can cause ovarian

cancer and mesothelioma.

• Allegations Regarding overhyped drug trials.

• Giugno v. Bristol-Myers Squibb Company

• Plaintiff alleged that defendants omitted disclosing that a drug trial was

more likely to fail than they represented, and therefore, their statements

about business, operations and prospects were materially false and/or

misleading and lacked a reasonable basis.

Behind the Numbers – Costs and

Effective Defense• Range of defense costs by stage.

• MTD

• Class Certification

• Discovery

• Experts

• Summary Judgment

• Trial

• How to effectively manage outside counsel and motivate

internal resources.

• Insurance and other risk management strategies.

Case Study:

M&A Litigation Case

• Deal announced that Company A is acquiring Company B.

• Within hours plaintiffs’ securities firms issue press

releases that they are investigating whether Company B’s

Board breached its fiduciary duties to shareholders.

• The litigation is filed and multiplies.• Lawsuits often filed before the preliminary proxy is filed.

• Plaintiffs prefer state courts because primary relief sought is injunctive

and they tend to move faster than federal courts. But, Delaware’s Trulia

decision has pushed significant number of cases to federal courts.

• Complaints often amended to include allegations based on disclosures in

proxy statement.

M&A Litigation Allegations

• All actions have same general theory: that Target, its Board and

the Acquirer breached their duty to shareholders (or aided and

abetted a breach). Suits seek to enjoin the transaction.

• Targets generally:

• The Target company;

• Directors and certain officers of the Target;

• The Buyer; and

• Advisors (maybe).

• Claims generally against: (1) target defendants for breaches of

fiduciary duties; and (2) buyers and advisors (sometimes) for

aiding and abetting.

M&A Litigation Allegations (Con’t)

• Conflicts of interest.

• Affiliates or large shareholder involvement.

• Board acceleration of stock appreciation rights.

• Management negotiation of employment and

compensation.

• Advisors dealing on both sides of transaction.

• Agreement inhibits higher offers with preclusive deal terms.

• Company is being sold for too little in light of recent financials.

• Inadequate/misleading disclosures to shareholders.

Enforcement Landscape

• Focus on Main Street Investor

• Cases against financial institutions and intermediaries.

• Accounting fraud.

• Sales of unsuitable products.

• Pursuit of unsuitable trading strategies.

• Pump and dump frauds.

• Ponzi schemes

• Trend away from “broken windows” strategy of going after “paper-

work” violations, unless indicative of repeated indifference or

overall lax environment that could lead to investor harm.

Enforcement Landscape (Con’t)

• Individual Accountability

• Since Chairman Clayton took office, one or more individuals have

been charged in more than 80 percent of standalone enforcement

actions.

• Cyber Unit

• Includes experts in cyber intrusions, distributed ledger technology,

and the dark web.

• Will target cyber-enabled misconduct such as market manipulation

schemes that hack into electronic accounts of others and force

trades to pump up stock price, or brokering stolen inside

information on the “dark web”.

Enforcement Landscape (Con’t)

• No “Hush” Agreements

• Employment or severance agreements that contain clauses (non-

disparagement or non-disclosure) that can be read to prohibit

reporting of improper practices to SEC or other regulators, or

restrict ability of whistleblowers to accept financial rewards for

reporting to the SEC.

• Examples include NeuStar, Anheuser-Busch, and BlackRock.

• Whistleblower Protections Narrowed

• Supreme Court Ruling in Digital Realty Trust v. Somers held that

employees who report violations of securities laws to their

supervisors or corporate compliance programs, but not to the SEC,

are not protected from retaliation under Dodd-Frank.

• Past studies show that approximately 85% of whistleblowers report

concerns to their managers.

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New Developments in Securities Class Actions - acc.com · 4/25/2018 · •This despite the fact...

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