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.?

By clicking on the title of any case writeup, you can expand beyond the introductory paragraph to read the entire summary and analysis, and you also can access the underlying material. Clicking on the title of any case writeup also automatically will take you to our Need-To-Know Litigation Weekly microsite, which provides separate links to the three substantive areas (Securities Litigation, M&A Litigation and Government/Regulatory Enforcement), each of which contains filters that are searchable both by substantive topic and by time period that will enable you to search and access our existing case summaries and analyses.

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Recent Developments


SECURITIES LITIGATION

Southern District Of New York Dismisses Securities Fraud Claims For Failure To Plead Reliance And Scienter

On July 10, 2017, Judge John G. Koeltl of the United States District Court for the Southern District of New York dismissed a putative securities fraud class action against E*TRADE Securities LLC (“E*TRADE”), E*TRADE Financial Corporation (“E*TRADE Financial), and one current and one former officer of E*TRADE Financial. Schwab v. E*TRADE Fin. Corp., No. 16-cv-05891 (S.D.N.Y. July 10, 2017). Plaintiff alleged that E*TRADE misled its clients by falsely representing that it would execute orders consistent with its duty of “best execution,” which requires it to use “reasonable diligence” to obtain the most favorable price for a customer under “prevailing market conditions.” Plaintiff brought claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, as well as control person claims under Section 20(a) of the Exchange Act. The Court granted defendants’ motion to dismiss, holding that plaintiff failed to adequately plead reliance or scienter, and also failed to plead culpable participation sufficient to state a control person claim.

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Northern District of California Partially Dismisses “Defeat Device” Claims Against Volkswagen For Failure to Plead Scienter

On July 19, 2017, Judge Charles R. Breyer of the United States District Court for the Northern District of California partially dismissed a putative class action against Volkswagen Aktiengesellschaf (“VW AG”), Volkswagen Group of America, Inc. (“VWGoA”), Volkswagen Group of America Finance, LLC (“VWGoAF”), and former executives of VW AG and VWGoA. In re: Volkswagen “Clean Diesel” Marketing, Sales Practices, And Products Liability Litigation, MDL No. 2762 CRB (JSC) (N.D. Cal. July 19, 2017). Plaintiffs are institutional investors who purchased bonds offered by VWGoAF. VWGoAF is a wholly-owned subsidiary of VWGoA, and the bonds were guaranteed by VW AG, the ultimate parent of VWGoA and VWGoAF. Plaintiffs alleged that defendants failed to disclose Volkswagen’s use of “defeat device” software to mask emissions in the company’s diesel engines, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Court concluded that plaintiffs had plausibly alleged that the bond offering memorandum was misleading, and that some, but not all, of the defendants made statements and omissions in the offering memorandum with scienter.

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M&A LITIGATION

Delaware Chancery Court Finds No Fiduciary Duty Breach, Notwithstanding Entire Fairness Review, And Determines Appraisal Value To Be Well Below Deal Price

On July 21, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery (i) entered judgment in favor of defendants Sprint Nextel Corporation (“Sprint”) and Softbank Corp. (“Softbank”) on claims of breaches of fiduciary duty and aiding and abetting, respectively, in connection with Sprint’s merger with Clearwire Corporation (“Clearwire”); and (ii) appraised the fair value of Clearwire’s stock at the time of the merger, awarding the dissenting stockholder petitioners $2.13 per share, notwithstanding that the transaction closed at $5.00 per share. ACP Master, Ltd., et al. v. Sprint Corporation, et al. & ACP Master, Ltd., et al. v. Clearwire Corporation, C.A. No. 8508-VCL, C.A. No. 9042-VCL (Del. Ch. July 21, 2017). Stockholder petitioners had challenged the merger, alleging that Sprint was a controlling stockholder of Clearwire and allegedly breached its fiduciary duties during negotiations leading to a deal price that substantially undervalued Clearwire. Applying an entire fairness standard of review, the Court found that Sprint did not breach any fiduciary duties. Noting that the appraisal statute requires the exclusion of “any synergies present in the deal price,” the Court evaluated the competing discounted cash flow (“DCF”) analyses offered by the parties and adopted the $2.13 per share value determined by the approach offered by Sprint, even though it amounted to less than half of the $5.00 per share deal price.

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Delaware Chancery Court Issues Opinion Offering Rare Interpretation Of Stock Transfer Restriction Provision, Delaware General Corporation Law Section 202

On July 10, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery found plaintiff was not bound by stock transfer restrictions under which the company had sought to revoke his ownership and was therefore entitled to inspect the books and records of a company in which he held stock. Henry v. Phixios Holdings, Inc., C.A. No. 12504-VCMR (Del. Ch. Jul. 10, 2017). The opinion is one of few offering substantive guidance regarding Delaware General Corporation Law (“DGCL”) Section 202, 8 Del. C. § 202, a provision governing stock transfer restrictions. Applying the statute, the Court held that “in order for a stockholder to be bound by stock transfer restrictions that are not ‘noted conspicuously on the certificate or certificates representing the security,’ he must have actual knowledge of the restrictions before he acquires the stock” or “affirmatively assent[] to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions.”

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GOVERNMENT/REGULATORY ENFORCEMENT

Second Circuit Overturns Convictions, Dismisses Indictments In LIBOR Case Due To Taint Of Testimony Compelled By Foreign Government

On July 19, 2017, the United States Court of Appeals for the Second Circuit overturned the convictions of Anthony Allen and Anthony Conti, former traders at Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) who played roles in Rabobank’s London Interbank Offered Rate (“LIBOR”) submission process. United States v. Allen, et al., No. 16-939. The Second Circuit held that each defendant’s Fifth Amendment right against self-incrimination had been violated because the indictments and convictions were obtained in part based on their own testimony, which had been obtained involuntarily (though lawfully) when they were compelled to testify in a separate investigation conducted by the financial regulator in the United Kingdom. Id. at 80. Even though the government did not use Allen’s and Conti’s compelled testimony directly against them, either in the grand jury testimony or at trial, one of the government’s key witnesses had seen their compelled testimony; and the Second Circuit concluded that the government could not demonstrate, under Kastigar v. United States, 406 U.S. 441 (1972), that his testimony was not tainted or that the use of his testimony was harmless. The Second Circuit’s decision in Allen will create numerous and wide-ranging potential pitfalls for U.S. prosecutors, who increasingly find themselves investigating potential crimes across borders and in conjunction with foreign criminal and regulatory authorities, many of whom allow for compulsory witness statements.
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The Second Circuit Overturns Watershed Conviction Of Sheldon Silver Based On Recent Supreme Court Decision

On July 13, 2017, the U.S. Court of Appeals for the Second Circuit overturned the high-profile, political corruption conviction of one of the most powerful politicians in New York State— former Speaker of the New York State Assembly, Sheldon Silver. United States v. Silver, 2017 WL 2978386, at *17 (2d Cir. July 13, 2017). The Second Circuit grounded its decision on erroneous jury instructions, which it believed tainted all counts of conviction. Though the instructions were consistent with Second Circuit law at the time they were provided to the jury, the Second Circuit held that they did not comport with the Supreme Court’s recent interpretation of what constitutes an “official act” for purposes of the “honest services fraud” and extortion statutes, as set forth in McDonnell v. United States, 136 S. Ct. 2355 (2016). The Court further held that this error was not harmless, and vacated all counts of Silver’s conviction.
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