Shearman & Sterling LLP | Securities Litigation

Shearman Litigation:  Need-to-Know Litigation Weekly

Welcome to Shearman & Sterling LLP’s Need-To-Know Litigation Weekly, which analyzes notable U.S. decisions, orders and developments each week in areas of Securities Litigation, M&A litigation, and Government/Regulatory Enforcement.  This weekly newsletter is intended to supplement our various publications and thought leadership concerning these important substantive areas.?

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Recent Developments


SECURITIES LITIGATION

First Circuit Affirms Dismissal Of Securities Fraud Claims For Failure To Adequately Plead Scienter

On April 7, 2017, the United States Court of Appeals for the First Circuit affirmed the dismissal of a putative securities fraud class action against the biopharmaceutical developer Zafgen, Inc. (“Zafgen”) and its CEO. Brennan v. Zafgen, Inc., No. 16-2057, 2017 WL 1291194 (1st Cir. Apr. 7, 2017). Plaintiffs had asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, alleging that in Zafgen’s IPO registration statement and other public statements defendants omitted information regarding adverse events during clinical trials for Zafgen’s only drug in development, the obesity drug Beloranib. The Court held that plaintiffs did not adequately plead scienter under the heightened requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), stressing that a defendant’s mere knowledge of omitted information is not sufficient to support a cogent and compelling inference of fraudulent intent.

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Virgin Islands District Court Dismisses Securities Fraud Claims For Failure To Allege Falsity And Loss Causation

On April 6, 2017, Judge Harvey Bartle III, sitting by designation in the United States District Court for the District of the Virgin Islands, dismissed a putative class action against Altisource Asset Management Corporation (“AAMC”) and certain of its former directors and officers under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. City of Cambridge Ret. Sys. v. Altisource Asset Mgmt. Corp., No. 1:15-cv-00004, slip op. (D.V.I. Apr. 6, 2017), ECF No. 74. Plaintiffs alleged that AAMC—a provider of asset management and corporate governance advising services related to mortgage servicing—made material misstatements in SEC filings and other disclosures relating to services it provided to the mortgage servicing company Ocwen Financial Corporation (“Ocwen”) and certain related companies. The Court held that plaintiffs’ allegations were insufficient to demonstrate that the alleged misstatements were false or misleading, and further that plaintiffs failed to show that their claimed losses were caused by the alleged misstatements at issue.

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M&A LITIGATION

Delaware Chancery Court Applies Corwin To Dismiss Post-Merger Fiduciary Duty Claim After Finding A Royalty Agreement Did Not Constitute An Unreasonable Deal Protection Device

On April 13, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a shareholder derivative suit alleging a breach of fiduciary duty against the directors of Paramount Gold and Silver Corp. (“Paramount”) in connection with Paramount’s merger with Coeur Mining, Inc. (“Coeur”). In re Paramount Gold and Silver Corp. Stockholders Litigation, Consol. C.A. No. 10499-CB (Del. Ch. Apr. 13, 2017). In doing so, the Court (i) rejected plaintiffs’ contention that certain consent rights in a royalty agreement entered into by the parties at the time of the merger agreement constituted an unreasonable deal protection device, and (ii) found that plaintiffs had failed to identify any material deficiencies in the company’s disclosures in advance of a shareholder vote on the merger. Chancellor Bouchard, therefore, relied on the doctrine set forth in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and applied the business judgment rule to the directors’ decision “because the [m]erger was approved by a fully informed and uncoerced vote of a majority of Paramount’s disinterested stockholders.”

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GOVERNMENT/REGULATORY ENFORCEMENT

SEC Files Enforcement Actions Against Multiple Defendants In “Trolling-Type” Scheme To Generate False Publicity For Certain Issuers

On April 10, 2017, the Securities and Exchange Commission (”SEC”) announced fourteen enforcement actions, charging 28 businesses and individuals in connection with alleged schemes to pay writers to generate “bullish” articles relating to certain public companies, while concealing these promotion payments. See Press Release, SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, Rel. No. 2017-79 (Apr. 10, 2017), https://www.sec.gov/news/pressrelease/201779. Although the SEC did not allege that the articles contained any misstatements about the public companies, the SEC claimed that the failure to disclose the promotion payments violated the anti-fraud and anti-touting provisions of the federal securities laws, including Sections 17(a) and 17(b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

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