Section 11 of the Securities Act of 1933 gives investors a cause of action against issuers, directors, underwriters, and other professionals for making or omitting an untrue statement of material fact in a registration statement. 15 U.S.C. § 77k(a). The Securities Act also provides that both federal and state courts have jurisdiction over lawsuits alleging violations of the Securities Act. 15 U.S.C. § 77v(a). In 2018, the Supreme Court decided in Cyan, Inc. v. Beaver County Employees Retirement Fund that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of jurisdiction over class actions alleging violations of the Securities Act and does not permit defendants to remove such actions to federal court. 138 S. Ct. 1061, 1066 (2018).

Since the Supreme Court’s Cyan decision, at least two class actions asserting Section 11 claims have been brought in Texas state court. Macomb County Employee’s Retirement Sys. v. Venator Materials PLC, No. DC-19-02030, is currently pending in the 134th District Court in Dallas County, and Curti v. McDermott International, Inc., No. 2019-15473, is currently pending in the 113th District Court in Harris County. These cases were filled in February and March 2019, respectively. Two additional lawsuits were brought prior to the Supreme Court’s ruling in Cyan, were removed to federal court, stayed pending the outcome of Cyan, and then remanded back to Texas state court following Cyan. Those two cases are Rezko v. XBiotech, No. D-1-GN-17-003063, which was brought in the 200th District Court in Travis County, and St. Lucie County Fire District FF Fund v. Southwestern Energy Co., No. 2016-70, which was brought in the 61st District Court in Harris County. These cases illustrate a couple of early procedural measures available to defendants who are forced to defend these Section 11 cases in Texas state court.

First, in three of the four cases, the lawsuit was brought in the county where the issuer was headquartered. If the corporate defendant, however, is not incorporated in Texas and does not have its principal place of business in Texas, then a challenge to personal jurisdiction may be appropriate. That was the case in Venator Materials, where the issuer, underwriters, and individual defendants filed special appearances, which is the mechanism to challenge personal jurisdiction in Texas state court. TEX. R. CIV. P. 120a. While the Securities Act provides for nationwide service of process, which effectively provides for any federal district court to exercise personal jurisdiction over a defendant, multiple cases conclude that the nationwide service of process provision does not apply in state court. See, e.g., Niitsoo v. Alpha Nat’l Res., 2015 WL 356970, at *4 (W. Va. Cir. Ct. Jan. 8, 2015); Kelly v. McKesson HBOC, Inc., 2002 WL 88939, at *19 (Del. Super. Ct. Jan. 17, 2002). It remains to be seen how a Texas court will interpret this provision.

Second, in cases where the defendant is unable or unwilling to challenge personal jurisdiction, defendants should consider bringing a motion to dismiss under Texas Rule of Civil Procedure 91a. This rule permits a defendant to move to dismiss a cause of action on the ground that “it has no basis in law or fact.” TEX. R. CIV. P. 91a.1. A cause of action has no basis in law “if the allegations, taken as true, together with inferences reasonably drawn from them do not entitle the claimant to the relief sought.” Id. A cause of action has no basis in fact “if no reasonable person could believe the facts pleaded.” Many Texas intermediate appellate courts have likened Texas Rule of Civil Procedure 91a to Federal Rule of Civil Procedure 12(b)(6). See, e.g., In re Butt, 495 S.W.3d 455, 461 (Tex. App. 2016, no pet.) But there is one crucial difference. The party that loses a 91a motion to dismiss must pay to the prevailing party “all costs and reasonable and necessary attorney fees incurred” in asserting or responding to the motion. TEX. R. CIV. P. 91a.7. The defendants in McDermott International, XBiotech, and Southwestern Energy Co. filed Rule 91a motions to dismiss, and in XBiotech, the trial court granted the defendants’ Rule 91a motion to dismiss.

Barring dismissal, the next major steps in the Section 11 cases would be class certification under Texas Rule of Civil Procedure 42 and summary judgment under Rule 166a. None of these cases have progressed that far. In light of the Supreme Court’s ruling in Cyan, we can expect additional class actions asserting claims exclusively under the Securities Act will be brought in Texas state court. Defendants, however, should not forget that federal courts have exclusive jurisdiction for claims brought under the Securities Exchange Act of 1934. 15 U.S.C. § 78aa(a). Accordingly, lawsuits brought in Texas state court that assert Exchange Act claims (even in combination with Securities Act claims) are still removable to federal court, even after Cyan.


The Supreme Court has determined that anyone who passes on false or misleading statements to prospective investors with the intent to defraud is liable under Rule 10b–5, even if he is not deemed the “maker” of the statements. In Lorenzo v. SEC, Lorenzo was the director of investment banking at Charles Vista, LLC. At the direction of his boss, who supplied the information and approved the messages, Lorenzo emailed two potential investors about a debenture offering for a company that had “3 layers of protection, including $10 million in confirmed assets” (which largely included intangible assets of intellectual property). The problem was that Lorenzo knew that just a few days earlier, the company had publicly disclosed that the company had written off all of its intangible assets and stated that its total assets were worth only $370 thousand.

Lorenzo argued that he could not be liable under Rule 10b–5(b) (which makes it unlawful to “make an untrue statement of material fact”) and the Supreme Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision because he was not a “maker” of the false statement because his boss had the “ultimate authority” over the email’s content. Nonetheless, the SEC and D.C. Circuit concluded that Lorenzo was liable under Rule 10b–5, subsection (a) because he employed a device, scheme, and artifice to defraud. They determined he was also liable under subsection (c) because he engaged in an act, practice, or course of business that operated as a fraud or deceit. The Supreme Court affirmed the D.C. Circuit. In doing so, it rejected Lorenzo’s argument that subsection (b) is the only subsection that applies to false statements and that subsections (a) and (c) apply only to conduct other than false statements. The Supreme Court concluded that subsections (a) and (c) “capture a wide range of conduct,” and that the Supreme Court and the SEC have long recognized that there is “considerable overlap” between the three subsections of Rule 10b–5 and other provisions of the securities laws. The Court recognized that a different conclusion could permit plainly fraudulent behavior, such as occurred in this case, to fall outside of the scope of Rule 10b–5, which is “not what Congress intended.” The Supreme Court’s decision means that anyone who knowingly communicates false statements to potential investors will be held primarily liable, even if they were not ultimately responsible for the content of the communications.


On February 25, 2019, Eric Werner and Marshall Gandy from the Fort Worth Regional Office of the Securities and Exchange Commission presented to the Dallas Bar Association’s Securities Section on the topic: “2019 Enforcement Priorities for the Fort Worth Regional Office.”

The presentation started and largely centered on the Regional Office’s ability to “do more with less.” Mr. Werner told the audience that in 2018 the Regional Office employed 30 enforcement agents, but currently only employs 20. He remarked that fewer agents will necessarily result in fewer enforcement actions, though the downturn would “not be significant.” Still, Mr. Werner assured the audience that they would not see any notable change in the type of actions pursued by the Commission. And, if any change were observed, it would simply be a function of the type of cases ripe for prosecution, not a realignment of priorities. Perhaps most striking, Mr. Werner suggested resources would need to be reallocated to relitigate cases effected by the Supreme Court’s Lucia decision. His comment hinted at the Commission’s interpretation of the Supreme Court’s stance on relief for respondents with non-pending cases that were previously decided by the Commission’s Administrative Law Judges.

Mr. Gandy commented on the Commission’s examination processes, paying particular attention to the Commission’s desire to engage registrants and empower them to self-police. He told the audience the Office of Compliance Inspections and Examinations does not measure success by how many cases are referred to the Division of Enforcement. He sought to dispel the idea that “if you call [OCIE], you will be examined,” stating, “nothing could be further from the truth.” Mr. Gandy also commented on registrants’ compliance programs and the OCIE’s willingness to help prepare adequate programs.

Both Messrs. Werner and Gandy emphasized the Commission’s focus on Main Street, individual accountability, and the proper allocation of resources. Their tone was cooperative.


On January 4, 2019, the U.S. Supreme Court agreed to hear an appeal of the Ninth Circuit Court of Appeal’s controversial decision in Varjabedian v. Emulex Corp., 888 F.3d 399, 401 (9th Cir. 2018), cert granted, 19-459, 2019 WL 98542 (U.S. Jan. 4, 2019). The outcome of the appeal turns on the Court’s interpretation of Section 14(e) of the Securities Exchange Act. The relevant language reads:
It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
15 U.S.C. § 78n(e). The Second, Third, Fifth, Six, and Eleventh Circuits have all determined that Section 14(e) requires proof of scienter—the defendant must be shown to have intended to omit or make an untrue statement of material fact to be held liable. The Ninth Circuit decision is the first to break with this trend.

Contrary to its sister courts, the Ninth Circuit determined that Section 14(e) differs from, and therefore should not be read together with, Exchange Act Rule 10b-5. The Ninth Circuit relied on the Supreme Court’s holding in Ernst & Ernst v. Hochfelder to reason that, despite identical language, Section 14(e) and Rule 10b-5 were promulgated at different times and for distinct purposes and therefore require differing proofs of mental culpability. Unlike Section 14(e)—enacted by statute—the Ninth Circuit recognized that Rule 10b-5 is an SEC Rule derived from the Commission’s powers under § 10(b), powers purposed to control “manipulative or deceptive device[s].” 15 U.S.C. § 78j(b). The court found Section 14(e) governing a “broader array of conduct” and therefore requiring less mental culpability. The Ninth Circuit reasoned that in order to interpret “statutes dealing with similar subjects . . . harmoniously,” Section 14(e) of the Exchange Act ought not require proof of scienter, just as the Supreme Court determined to be the case for the nearly identically worded Section 17(a)(2) of the Securities Act of 1933 in Aaron v. SEC. Finally, the Ninth Circuit concluded that Section 14(e) was never purposed to include a scienter requirement because it was passed as part of the Williams Act of 1968 and was accompanied by a Senate Report stating the purpose of the Williams Act was “to insure that public shareholders . . . will not be required to respond without adequate information,” suggesting “[an] emphasis on the quality of information . . . [not] on the state of mind harbored.” All eyes now turn to the Supreme Court to resolve the Circuit Court split.


Late last month, the SEC issued an order detailing how it would proceed with administrative actions pending before the SEC in light of the Supreme Court’s recent ruling in Lucia v. S.E.C., No. 17-130, which found that the SEC’s Administrative Law Judges (“ALJs”) must be appointed by the SEC Commissioners, not the SEC staff, as had been done previously. Shortly after the Supreme Court’s decision in Lucia, the SEC stayed any pending administrative proceedings.

The SEC’s order lifted the stay and reiterated that the Commission approved of all of the ALJs’ appointments as its own. The order then explained that the SEC would permit any respondent with a proceeding pending before an ALJ or before the Commission on an appeal from an ALJ decision to be provided with an opportunity for a new hearing before an ALJ who did not previously participate in the manner. The order explained that the new ALJ, “shall not give weight to or otherwise presume the correctness of any prior opinions, orders, or rulings issued in the matter.” New assignments must be made prior to September 21, 2018.

The SEC’s order addresses the Supreme Court’s concern in Lucia’s case that on remand, the ALJ who conducted the initial hearing could not be expected to consider the matter as though he had not adjudicated it before in a new hearing, even after receiving a constitutionally valid appointment. The order, however, is silent about any relief for respondents with non-pending cases that were previously decided by an ALJ without a constitutionally valid appointment.


On June 21, the Supreme Court issued its opinion in Lucia v. S.E.C., reversing sanctions ordered by an Administrative Law Judge (“ALJ”) appointed by SEC staff and not the SEC Commissioner. ALJs are tasked with presiding over SEC enforcement proceedings, and the Court held that they must be appointed by the Commissioner and not staff because ALJs are “Officers of the United States” within the meaning of the Article II, Section 2, Clause 2 of the United States Constitution (“Appointments Clause”).

The SEC is authorized by statute to institute administrative proceedings against alleged wrongdoers, and the Commission itself is permitted to preside over the proceedings. 17 CFR § 201.110 (2017). The Commission is also authorized by statute to delegate administrative proceedings to ALJs and has done so. See 15 U.S.C. § 78d-1(a). ALJs possess significant powers over discovery, motion practice, the admissibility of evidence and testimony, and generally regulating the course of proceedings, including the ability to impose sanctions. 17 CFR §§ 201.111, 201.180, 200.14(a), 201.230. At the conclusion of administrative proceedings, ALJs issue an “initial decision,” setting out “findings and conclusions” about all “material issues of fact [and] law,” including an “appropriate order, sanction, relief, or denial thereof.” Id. at §§ 201.360(a)(1), 201.360(b), 201.360(d)(1). After the “initial decision,” the SEC can either review and modify the decision or, without review, “issue an order that the [ALJ’s] decision has become final.” Id. at § 201.360(d)(2).

In Lucia, the SEC initiated an administrative proceeding against Raymond Lucia, charging Lucia and his investment company with violating the Investment Advisers Act for misleading clients into investing an a retirement saving strategy called “Buckets of Money.” The SEC assigned the case to ALJ Cameron Elliot, who determined Lucia should be sanctioned, charged $300,000 in civil penalties, and banned from the investment industry for life.

The Appointments Clause states that all “Officers of the United States, whose Appointments are not herein otherwise provided for . . . [may be appointed by] the President alone, [by] the Courts of Law, or [by] the Heads of Departments.” Central to the Court’s decision was the characterization of ALJs as “officers” rather than mere “employees.” Lucia argued that Judge Elliot was an “Officer of the United States” and was not duly appointed by a “Head of Department,” namely, the SEC Commissioner. After the D.C. Circuit rejected his argument, he appealed to the Supreme Court to resolve the emerging circuit split. See Bandimere v. SEC, 844 F.3d 1168, 1179 (2016).

Justice Kagan spoke for the Court, penning an opinion that largely tracked the Court’s Appointments Clause jurisprudence. The Court commented that its opinion in Freytag v. Commissioner, 501 U.S. 868, 873 (1991), “says everything necessary to decide this case.” Freytag held that “special trial judges” (STJs) of the United States Tax Court were “Officers of the United States” after applying the “significant authority” test articulated in Buckley v. Valeo, 424 U.S. 1 (1976). See also United States v. Germaine, 99 U.S. 508 (1879).

Reviewing the facts, the Court determined that ALJs exercise “significant discretion” when carrying out “important functions” including “all of the authority needed to ensure fair and orderly adversarial hearings—indeed, nearly all the tools of federal trial judges.” The Court reversed the judgement of the Court of Appeals, ordered a new hearing before a “properly appointed” official, and determined that Judge Elliot could not hear the case because he could not be expected to consider the matter as though he had not adjudicated it before.

Interestingly, in footnote 6, the Court commented that while the present case was moving through the courts, the SEC issued an order “ratifying] the prior appointments of its ALJs.” The Court found “no reason to address that issue” because “[t]he SEC may decide to conduct Lucia’s rehearing itself” or “it may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.” This leaves open the question of whether the SEC’s ratification was effective to retroactively protect rulings from constitutional attack or whether the ratification simply authorized ALJ proceedings moving forward.


The Supreme Court has ruled in Digital Realty Trust, Inc. v. Somers that certain protections afforded to whistleblowers under the Dodd-Frank Act do not apply if the employee reports possible violations of the securities laws internally but not to the SEC. The Dodd-Frank Act prohibits employers from discharging, demoting, suspending, threatening, harassing, or discriminating against a “whistleblower” who engages in certain protected activity. 15 U.S.C. § 78u-6(h)(1)(A). The Dodd-Frank Act defines “whistleblower” as any individual who provides information relating to a violation of the securities laws to the SEC. Id. § 78u-6(a)(6). Inconsistently, however, one of the three enumerated protected activities in section 78u-6(h)(1)(A) is a catchall provision that protects individuals who make disclosures that are required or protected under certain laws, including the Sarbanes-Oxley Act, which itself covers reporting possible wrongdoing internally.

Somers was employed by Digital Realty Trust, and he alleged that Digital Realty Trust fired him shortly after he reported possible securities law violations to senior management. Somers did not, however, make any report to the SEC before he was terminated. Somers sued Digital Realty Trust alleging a whistleblower retaliation claim under the Dodd-Frank Act. The district court denied Digital Realty Trust’s motion to dismiss, in which it argued that Somers was not a whistleblower under the Dodd-Frank Act because he did not report any suspected securities laws violations to the SEC. The Ninth Circuit affirmed in an interlocutory appeal, and the Supreme Court granted certiorari to resolve a circuit split on the issue. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013); Berman v. NEO@OGILVY LLC, 801 F.3d 145, 155 (2d Cir. 2013).

The Supreme Court reversed the Ninth Circuit, holding that the anti-retaliation provision in the Dodd-Frank Act does not extend to an individual who does not report the suspected securities law violations to the SEC. For the Supreme Court the question was fairly easy: “When a statute includes an explicit definition, we must follow that definition,” and this “resolves the question before us.” Somers, slip. op. at 9. The Supreme Court also explained that the Dodd-Frank Act has a separate provision that protects an employee providing information to the Consumer Financial Protection Bureau, or his or her employer, and courts presume Congress acts intentionally when it includes language in one section of a statute but omits it from another section. Regarding the alleged inconsistency concerning the third enumerated protected activity identified above, the Supreme Court explained that under its plain-text reading, the statute protects employees who report both internally and to the SEC, but are retaliated against solely because of the internal reporting. This protects employees who would otherwise not be protected under the first two enumerated provisions. Additionally, the Supreme Court’s ruling is consistent with the Dodd-Frank Act’s intended purpose of encouraging individuals to report possible securities violations to the SEC and its corresponding whistleblower bounty program.