Salzberg v. Sciabacucchi (opinion linked here) presented the Delaware Supreme Court with a clash of policies regarding forum-selection provisions: Helping Delaware corporations avoid the inefficiencies in having to defend claims under the Securities Act of 1933 in multiple forums, state and federal, versus preventing those corporations from barring the state courts of Delaware (the Chancery Court in particular) from adjudicating cases involving the internal affairs of Delaware corporations. Carefully parsing pertinent language from statutes and case law—drawing distinctions among “internal affairs,” “internal corporate claims,” and “intra-corporate affairs”—the Court managed to preserve and promote the former policy while doing no harm to the latter, as it held Delaware corporate charter provisions that require ’33 Act claims to be brought in federal court, rather than the state courts of Delaware, to be facially valid.


On December 30, 2019, the Second Circuit issued its United States v. Blaszczak1 opinion, eliminating a serious hurdle that might otherwise dissuade federal prosecutors from pursuing a Title 18 fraud claim against an alleged inside trader. The court determined that, unlike Title 15 securities fraud, federal wire fraud and Title 18 securities fraud claims do not require proof that the alleged insider received any personal benefit in exchange for the disclosure of non-public information.

In Blaszczak, federal prosecutors alleged that an employee of the Centers for Medicare & Medicaid Services (CMS) had been illegally disclosing information about reimbursement rate adjustments to a political consultant, who in turn, had been forwarding the information to a group of hedge fund managers, who were trading and profiting on the non-public information.

After the presentation of evidence, the district court instructed the jury that, in order to convict the defendants with Title 15 securities fraud, they would have to find the defendants received a “personal benefit” in exchange for the disclosure of non-public information. However, the court did not include the same “personal benefit” instruction in its Title 18 charge. After many days of deliberation, the jury acquitted each defendant on all counts alleging Title 15 securities fraud, but found the CMS employee guilty on one count of wire fraud, the political consultant guilty on two counts of wire fraud and two counts of Title 18 securities fraud, and the hedge fund managers guilty on one count of wire fraud and one count of Title 18 securities fraud.

On appeal to the Second Circuit, the appellants argued that pursuant to the Supreme Court’s Dirks v. SEC2 opinion, the district court erred by not including the “personal benefit” instruction in its Title 18 question. The Second Circuit rejected appellants’ argument, reasoning that Title 15 and Title 18 were enacted for very different purposes. Title 15 (the statute at issue in Dirks) was enacted as part of the Securities and Exchange Act of 1934. While Title 18 was enacted as part of the Sarbanes-Oxley Act of 2002. And, despite both statutes prohibiting schemes to “defraud,” the meaning of the operative term was not shared.

According to the court, Title 15 was enacted for the limited purpose of eliminating insider trading for “personal advantage.” Whereas, Title 18 “was intended to provide prosecutors with a different and broader—enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provision;” it was purposed to overcome the “technical legal requirements” that other fraud provisions created.

The court determined that because the statutes were enacted for two very different purposes and because the personal benefit test in Dirks was “judge-made doctrine” specifically premised on the limited purpose of Title 15, the personal benefit test should not apply to Title 18 securities fraud claims. Still, the court rejected appellants’ argument that the district court had opened a “backdoor” through which prosecutors could effectively pursue securities fraud claims that would otherwise require proof of a personal benefit. The court rejected this argument, stating that there will always be statutory overlap—where prosecutors can choose between multiple statutory causes of action for the same underlying conduct—but that such overlap is no reason to ignore legislative intent. According to the court, if the legislature believed they had inadvertently created a “backdoor,” it was up to them to intentionally close it.

The takeaway is simple. Whether or not the alleged disclosing party has secured any benefit by sharing non-public information, it could face criminal liability for its actions. Defense attorneys should be cognizant of Title 18’s requirements when assessing the chances of acquittal and make their clients aware of such risk.

1 18-2811, 2019 WL 7289753 (2nd Cir. Dec. 30, 2019).
2 463 U.S. 646, 662 (1983).


As we discussed in a prior blog post, class action lawsuits brought under Section 11 of the Securities Act of 1933 are now being brought in Texas state court following the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018). In responding to such lawsuits, defendants may consider filing an Anti-SLAPP Motion to Dismiss under the Texas Citizens Participation Act (the “TCPA”). SLAPP stands for a “strategic lawsuit against public participation.” Under the TCPA, a defendant may move to dismiss a SLAPP suit brought in response to the defendant’s right to petition, association, or free speech. To avoid dismissal, the plaintiff must establish by clear and specific evidence a prima facie case for each element of the claim in question. TEX. CIV. PRAC. & REM. CODE § 27.005(b). The TCPA also has certain protections built into the statute, such as a mandatory discovery stay, requirements for expedited consideration of the motion, and a mandatory award of attorneys’ fees and costs if the court dismisses any claims. Id. §§ 27.003(c); 27.004(a); 27.009(a). To take advantage of the TCPA, a moving defendant first must establish that the lawsuit is based on or is in response to a party’s exercise of his or her right to petition, right of association, or right to free speech. Id. § 27.003(a).

As demonstrated in Macomb County Employee’s Retirement Sys. v. Venator Materials PLC, No. DC-19-02030, a defendant in a Section 11 class action may argue that the TCPA applies in a couple of ways. First, a defendant may argue that communications made in a registration statement implicate the defendant’s right to petition because they are communications that pertain to an executive proceeding before a department of the federal government (the SEC) and because they are communications in connection with an issue under consideration or review by an executive or other governmental body. TEX. CIV. PRAC. & REM. CODE §§ 27.001(4)(A)(iii); 27.001(4)(B). Additionally, to the extent the alleged misstatements at issue were made in connection with matters of political, social, or other interest to the community or are subject of concern to the public, then the communications would implicate the defendant’s right to free speech, which is another hook for the TCPA’s application. Id. §§ 27.001(7)(B); 27.001(7)(C). Currently, right to free speech implicated any issues related to health or safety, or environmental, economic, or community well-being. But a recent amendment to the TCPA, which goes into effect on September 1, 2019, removes these topics from the operative definition and will force a defendant to argue that the communications were matters of social or other interest to the community or a subject of public concern generally. See 86th Leg., R.S., H.B. No. 2730, § 1. The court has not yet ruled on the defendants’ TCPA motion to dismiss in the Venator Materials case, but the TCPA’s application to class action lawsuits brought under Section 11 of the Securities Act is an area ripe for litigation in the near future and a possible avenue for a defendant to gain quick dismissal and recover its fees and costs if the motion is successful.


Whether or not certain interests in investment contracts qualify as securities have long been subject to the test set forth in SEC v. W.J. Howey, 328 U.S. 293 (1946). At the end of June, the Fifth Circuit provided additional guidance on one of the Howey factors—whether the investors expect to profit “solely from the efforts of” others.

Securities and Exchange Commission v. Arcturus Corp., et al, No. 17-10503, 2019 WL 2622534 (5th Cir. June 27, 2019) came to the Fifth Circuit on appeal from the district court’s grant of the SEC’s motion for summary judgment holding that the interests in oil and gas drilling joint ventures at issue were securities. The defendants had sold interests in several oil and gas drilling projects to investors, had not registered the interests as securities, and the SEC brought this civil enforcement action.

The Fifth Circuit’s analysis walks through the factors from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) used in determining whether investors expect to profit solely from a third-party’s efforts, analyzes how the facts of this case fit into those factors, concludes that fact issues precluding summary judgment, and reverses the grant of summary judgment and remands the case for trial.

Under Williamson, an investor is dependent solely on efforts of others when: “(1) an agreement among the parties leaves so little power in the hands of the partner or venture that the arrangement, in fact, distributes power as would a limited partnership; or (2) the partner or venturer is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers; or (3) the partner or venture is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership of venture powers.” Williamson, 645 F.2d at 424. Here, the district court held investors had no real control because any powers granted were illusory, investors lacked experience because the interests were marketed through a broad cold-calling campaign, and investors were reliant on the managers because the manager controlled the assets and a replacement manager would not have access to those assets. Arcturus, No. 17-10502, 2019 WL 2622534 at *5.

The Fifth Circuit analyzed each of the Williamson factors at length, eschewing a cookie-cutter approach to applying the definition of “securities” and instead highlighting that the nuances and realities of a given business venture and its participants play key roles in determining whether the interest is a security.

For example, when evaluating the powers of the parties, the Court highlighted that the joint venture agreement allowed investors to remove the managers with a 60% vote and that almost all of the Managers’ powers were subject to veto by the investors. Arcturus, No. 17-10502, 2019 WL 2622534 at *8-9. The Court also highlighted that there was evidence that investors held votes and, in so doing, actually exercised the powers granted in the joint venture agreement. Id. at *9. The Court also evaluated the voting structure of the venture, how the investors received information, how the investors communicated with each other and the number of investors. Id. *9-12. Likewise for the other Williamson factors, the Court went into great factual detail and determined that fact issues existed to preclude summary judgment due to a mixed and/or incomplete record on issues such as the experience of the investors (there was only evidence in the summary judgment record as to the experience of about 25 of the 340 investors) and whether the managers were effectively irremovable due to their control of the assets. Id. at *13-18.

In short, the Arcturus opinion provides a map for transactions and litigation alike to explain the pertinent facts that would inform the determination of whether interests in a joint venture are securities. It provides a clear message that whether an interest is a security is an inquiry that must be made based on the facts of any given business arrangement and which litigants should be prepared to support with evidence in order to make their case.


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.