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, Government/Regulatory Enforcement, and Antitrust Litigation. This weekly newsletter is intended to supplement our various publications and thought leadership concerning these important substantive areas

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Recent Developments


Fourth Circuit Court Of Appeals Affirms Dismissal Of Securities Fraud Class Action, Stating That Scienter Cannot Be Pled By “Stacking Inference Upon Inference”

On November 15, 2017, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of a putative securities fraud class action against PowerSecure International, Inc. (the “Company” or “PowerSecure”), and Sidney Hinton, its president and CEO. Maguire Fin. LP v. PowerSecure Int’l Inc., No. 16-2163 (4th Cir. Nov. 15, 2017). Plaintiffs alleged that defendants defrauded investors by knowingly making misrepresentations about the renewal of a major contract in violation of Section 10(b) of the Securities Exchange Act of 1934. The district court dismissed the complaint after finding that plaintiffs failed to adequately allege scienter. The Fourth Circuit affirmed, stating that “[a] plaintiff may not stack inference upon inference” to satisfy the PSLRA’s heightened pleading requirements for scienter.

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Second Circuit Affirms “Dark Pool” Class Certification Order, Reiterating Limited Scope Of Affiliated Ute, But Holding That Direct Evidence Of Price Impact Is Not Always Required To Satisfy Basic’s Presumption Of Reliance And That Defendants Attempting To Sever The Link Between Alleged Misrepresentations And Plaintiffs’ Purchase Price Must Do So By A Preponderance Of The Evidence

On November 6, 2017, the United States Court of Appeals for the Second Circuit affirmed a class certification order in a case concerning claims under the Securities Exchange Act of 1934 (the “Exchange Act”) relating to the operation of alternative trading systems (so-called “dark pools”). Waggoner v. Barclays PLC, No. 16-1912-cv, -- 3d. -- (2d Cir. Nov. 6, 2017). Plaintiffs—three individuals who purchased American Depository Shares in Barclays PLC—asserted claims against Barclays PLC, its U.S. subsidiary Barclays Capital Inc., and three senior officers of the companies, based on allegedly misleading statements indicating that Barclays monitored its alternative trading system (known as Liquidity Cross or “LX”) to protect clients from high-frequency traders. In affirming class certification based on the presumption of reliance in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Second Circuit held that direct evidence of price impact is not always required in order to demonstrate market efficiency.

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Delaware Court Of Chancery Rejects Books-And-Records Demand Driven By Entrepreneurial Counsel

On November 13, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected a stockholder’s demand to inspect books and records of A. Shulman, Inc. (the “Company”) under Delaware General Corporation Law Section 220. Wilkinson v. A Schulman, Inc., C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017). The Court explained that a stockholder who lacks a “proper purpose” and has “only minor and non-substantive involvement” in the demand process is not entitled to inspect books and records.

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Delaware Supreme Court Affirms Delaware Court Of Chancery’s Use Of Its Own DCF Method To Determine Fair Value After Controller-Directed Cash-Out Merger

On October 30, 2017, the Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery determining the fair value of ISN Software Corp. (“ISN”) in an appraisal action brought by minority stockholders following the cash-out merger of ISN with its wholly-owned subsidiary, at the direction of its controlling stockholder. In re ISN Software Corp. Appraisal Litig., C.A. No. 8388-VCG (Del. Oct. 30, 2017). As discussed in our post regarding the Court of Chancery’s August 11, 2016 decision, the Court rejected the various methodologies advanced by the parties’ competing experts and, instead, conducted its own discounted cash flow analysis to arrive at the “fair value” of ISN, which Vice Chancellor Glasscock determined was $357 million, more than double the consideration paid in the merger but significantly less than the valuations sought by plaintiffs. (See Shearman & Sterling LLP, Delaware Chancery Court Utilizes DCF Method To Determine Fair Value Of ISN Software Corp., August 22, 2016 Need-to-Know Litigation Weekly, The short order from the Delaware Supreme Court states that the decision of the Delaware Court of Chancery “should be affirmed on the basis of and for the reasons assigned” in the lower court’s opinion.

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Bank Of Tokyo Mitsubishi Sues DFS And Alleges That DFS Has No Investigatory Or Enforcement Authority Over It Since It Is Now Federally Licensed

On November 7, 2017, in the midst of a pending examination by, and implementation of previously agreed upon consent orders with, the New York State Department of Financial Services (“DFS”), the Bank of Tokyo Mitsubishi UFJ (“BTMU”), Japan’s largest bank, converted its New York and other U.S. branch office licenses from state to federal licenses. This prompted DFS to issue an order asserting that it still had authority to investigate and prosecute violations of New York law by BTMU. BTMU then filed suit in the United States District Court for the Southern District of New York seeking to enjoin DFS from exercising any authority over BTMU. Complaint, The Bank of Tokyo-Mitsubishi UFJ, Ltd. v. Maria Vullo, No. 1:17-cv-08691 (S.D.N.Y. Nov. 8, 2017), ECF No. 1.

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CFTC Fines Cargill $10 Million For Misreporting Swap Trades

On November 6, 2017, the U.S. Commodity Futures Trading Commission (“CFTC”) filed a settled enforcement action against Cargill, Inc. (“Cargill”), an agriculture commodities trader, for allegedly misrepresenting the mid-market marks of swaps to counterparties and in reports to its swap data repository (“SDR”), in violation of the Commodity Exchange Act (“CEA”) and commission regulations. Cargill consented to the CFTC’s order and agreed to pay a penalty of $10 million, without admitting or denying the Order’s findings. In the Matter of Cargill, Inc. CFTC No. 18-03 (Nov. 6, 2017).

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Seventh Circuit Rejects Preliminary Injunction As Overbroad In Auto Dealership Management Software Case Alleging Agreement To Restrain Trade

On November 6, 2017, the Seventh Circuit Court of Appeals vacated a preliminary injunction in an action alleging an agreement in restraint of trade under Section 1 of the Sherman Act against defendants CDK Global, LLC and Reynolds & Reynolds Co. Authenticom, Inc. v. CDK Global LLC, No. 17‐cv‐318‐jdp (7th Cir. Nov. 6, 2017). In an opinion by Chief Judge Diane Wood, the Court held that the preliminary injunction exceeded the proper scope of a preliminary injunction to preserve the status quo and improperly imposed on the defendants a duty to deal with the plaintiff.

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Administrative Law Judge Upholds FTC Complaint Alleging That 1-800 Contacts Violated Section 5 Of The FTC Act By Unlawfully Restricting Online Competitor Advertising Through Anticompetitive Settlement Agreements

On October 27, 2017, the Federal Trade Commission announced a ruling by Administrative Law Judge D. Michael Chappell finding that online contact lens retailer 1-800 Contacts unlawfully restrained competition in violation of Section 5 of the FTC Act by restricting its competitors’ online search-based advertising through series of settlement agreements resolving trademark litigation it had filed against those competitors. In the Matter of 1-800 Contacts, Inc., Docket No. 9372 (U.S. Trade Commission, Oct. 27, 2017). In upholding the FTC’s complaint, ALJ Chappell found that the FTC had proved that the restrictions on the use of certain keywords in search-based advertising caused actual harm to consumers and competition in the market for the online sale of contact lenses in the United States and that the respondent 1-800 Contacts had failed to prove that the settlement agreements had countervailing procompetitive benefits that outweighed their harm to competition. As relief, the ALJ issued a broad remedial order prohibiting 1-800 Contacts from, inter alia, entering into any agreement that restricts a competitor’s ability to participate in search advertising auctions. Just as the Supreme Court’s landmark decision in Federal Trade Commission v. Actavis, Inc., 133 S. Ct. 2223 (2013), raised difficult questions as to how litigants could resolve patent disputes over pharmaceutical products, this decision raises difficult questions over potential settlements of trademark disputes, particularly in the context of internet search advertising.

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