Judge Neil Gorsuch’s confirmation hearings do not begin until March 20th, but if he is confirmed to replace the seat vacated by the late Justice Antonin Scalia, Judge Gorsuch could bring some skepticism of securities litigation plaintiffs to the high court. Although Judge Gorsuch has only authored a handful of opinions analyzing securities litigation cases while on the bench for the Tenth Circuit Court of Appeals, two opinions stand out as worth analyzing to give some insight into his views of securities litigation.

In MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P., Judge Gorsuch analyzed the issue of when Section 11 of the Securities Act of 1933 imposes liability on issuers who offer statements of opinions. 761 F.3d 1109, 110 (10th Cir. 2014). Judge Gorsuch thoroughly analyzed the case law and determined that there were three possibilities: (1) an issuer’s opinions about future events can never be actionable, (2) “a plaintiff must show both that the defendant expressed an opinion that wasn’t his real opinion (sometimes called ‘subjective disbelief’) and that the opinion didn’t prove out in the end (sometimes called ‘objective falsity’),” and (3) when a fiduciary or someone who holds himself out to be an expert offers an opinion that lacks an objectively reasonable basis. Id at 1112-15 (emphasis original). Although Judge Gorsuch seemed inclined to go with the second possibility as the correct standard, he concluded that he did not have to select a single approach because in the case at hand, plaintiffs’ complaint failed even under the third, investor-friendly, objectively reasonable basis test. Id. at 1117. Notably, when the Supreme Court looked at the same issue a year later in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, it followed Judge Gorsuch’s inclination. Now, under Section 11, an affirmative statement of opinion is only actionable when it is incorrect and when the speaker did not actually hold the stated belief. 135 S. Ct. 1318, 1326 (2015). This standard is more favorable to issuers than the objectively reasonable basis standard Judge Gorsuch seemed less inclined to adopt.

Even more telling is Judge Gorsuch’s opinion in ACAP Financial, Inc. v. SEC. In that case, the court denied a petition for review of an SEC review of a FINRA decision that imposed a $125,000 fine on a broker-dealer and its registered representative and suspended the registered representative from the securities industry for six months for failing to take sufficient steps to guard against the petitioners’ involvement in trading unregistered shares. 783 F.3d 763, 765 (10th Cir. 2015). Although the Court did not find any reason to overturn the SEC’s punishment based on the grounds raised by the petitioners, Judge Gorsuch noted that the petitioners failed to raise what he considered to be the more substantive arguments. Id. at 767-69. For example, Judge Gorsuch took the time to note that the petitioners did not argue that the SEC used this administrative proceeding to expand the definition of “egregious” and then retroactively applied that expanded definition to petitioners. Id. at 767. Nor did petitioners challenge the SEC’s ability to employ multi-factor balancing tests in deciding what sanctions to issue against petitioners. Id. at 769. As Judge Gorsuch noted somewhat wistfully, “the petitioners before us have repeatedly demurred when presented with the opportunity to challenge the propriety of the SEC’s decisionmaking process.” Id.

This opinion closely echoes Judge Gorsuch’s opinion—and concurrence to his own majority opinion—in Gutierrez-Brizuela v. Lynch. That case was not a securities litigation case but dealt with whether the Bureau of Immigration Affairs could retroactively apply a policy that interpreted an ambiguous statute contrary to a Tenth Circuit opinion. 834 F.3d 1142, 1143 (10th Cir. 2016). Judge Gorsuch determined that the Bureau of Immigration Affairs could not retroactively apply its policy, but he wrote separately in a concurring opinion to criticize the Chevron doctrine, which requires a court to give deference to an executive agency’s interpretation of an ambiguous statute when the agency’s interpretation is reasonable. Id. at 1149-58 (Gorsuch, J., concurring). In Judge Gorsuch’s view, de novo judicial review about what an ambiguous law means should replace the judicial deference given to the executive agency’s interpretation under the Chevron doctrine. Id. at 1158. As alluded to in ACAP Financial, Judge Gorsuch’s view of increasing judicial supervision of an executive agency’s interpretations would include increased judicial supervision of the SEC.

Finally, a handful of other cases in which Judge Gorsuch sat on the panel but did not author the opinion involved what were largely pro-defendant results in private securities litigation cases. See, e.g., Farley v. Stacy, 645 F. App’x 684 (10th Cir. 2016); United Food & Commercial Workers Union Local 880 Pension Fund, 774 F.3d 1229 (10th Cir. 2014); Cook v. Baca, 512 F. App’x 810 (10th Cir. 2013); Thomas v. Metropolitan Life Ins. Co., 631 F.3d 1153 (10th Cir. 2011). Although these cases are not a crystal ball for determining how Judge Gorsuch would come out on the next securities litigation issue facing the Supreme Court, those opinions do give some indication that Judge Gorsuch may take a skeptical view of securities litigation lawsuits, especially cases involving the SEC’s discretion in making and applying policies and rules.


In shareholder derivative litigation, one of the earliest questions for a plaintiff is whether the directors of a company are sufficiently independent and disinterested to consider a shareholder demand or whether pre-suit demand is excused. In Delaware, demand excusal is provided for by Court of Chancery Rule 23.1. In a recent Delaware Supreme Court decision, Sandys v. Pincus, authored by Chief Justice Strine, the Court confronted this question and highlighted that: (1) courts must consider real-life dynamics and human nature when deciding whether directors are independent and disinterested and (2) plaintiffs should conduct an inquiry into director independence prior to filing, including utilizing the statutory procedures for books and records requests. Sandys v. Pincus, No. 157, 2016, 2016 Del. LEXIS 627 (Del. Dec. 5, 2016).

Sandys was a derivative action filed by shareholders of Zynga, Inc. The complaint asserted the CEO and other managers and directors were granted an exception to a company rule preventing insider sales of shares until three days after an earnings announcement. Taking advantage of this exception, insiders sold 20.3 million shares at $12 per share. Immediately after the earnings announcement, the price dropped to $8.52 per share. Within three months after the earnings announcement, the share value had fallen to $3.18 per share. The complaint alleged wrongdoing by the directors who approved this exception.

The Court of Chancery dismissed the complaint for failure to adequately plead demand excusal under Rule 23.1. In evaluating the independence and disinterestedness of Zynga’s nine directors, the Court of Chancery found that only two of those directors, the two who sold shares under the exception, were interested.

The Delaware Supreme Court reversed. In its opinion, the Court analyzed the independence and disinterestedness of three additional directors and determined that when looking at the real-world implications of their relationships to the Zynga CEO, who benefitted greatly from this exception, there was a reasonable doubt that these directors could have properly exercised independent and disinterested business judgment in responding to a pre-suit demand. The Court characterized one director, Ellen Siminoff, as a “close family friend of the CEO” relying almost entirely on the fact that Siminoff co-owned a private plane with the CEO. The Court analogized this co-ownership to family ties that, as a part of human nature, would call into question Siminoff’s independence and disinterestedness because jointly owning an airplane was an uncommon relationship with high expenses requiring a great deal of cooperation between Siminoff and the CEO. The Court also found that there was a reasonable doubt that directors John Doerr and William Gordon were independent or disinterested. This determination was based in part on the fact that Doerr and Gordon were partners in a venture capital firm that owned 9.2% of Zynga and that also invested in a company co-founded by the Zynga CEO’s wife. The Court, however, focused most heavily on the fact that Zynga did not consider Doerr or Gordon to be independent directors under the NASDAQ listing rules.

While the Court acknowledged that characterization for the NASDAQ listing rules is not dispositive in every case, the Court afforded great weight to Zynga’s determination that Doerr and Gordon lacked independence. While the Delaware Supreme Court reversed the Court of Chancery’s dismissal under Rule 23.1, the Delaware Supreme Court highlighted that the plaintiff had made the demand excusal determination more difficult by not conducting more pre-suit investigation or pleading more particularized facts as to the directors’ lack of independence. In particular, the Delaware Supreme Court emphasized that, while plaintiff made a pre-suit books and records request, the plaintiff had only sought books and records relating to the transaction he sought to redress. The Court said that plaintiff should have also used the books and records request to investigate the independence of the board. Companies should, therefore, expect prospective shareholder derivative plaintiffs to make greater use of books and records requests to inquire as to the independence of directors prior to filing.


Federal—A Change in Course for Financial Regulation and the SEC?

President-elect Trump gave few specifics on how he would handle financial regulation and the SEC during his campaign. His comments regarding Dodd-Frank, including his promise to “dismantle” it, imply a new era of reduced regulation. But he also repeatedly criticized his opponent for being “owned” by big banks, and his website called for a “21st Century Glass-Steagall,” referring to the law that required separation between investment and commercial banking until its repeal in 1999. Trump’s choices during the transition, however, have now clarified his approach.

To lead the transition team’s efforts on financial regulation, Trump chose former SEC commissioner Paul Atkins. Atkins is a staunch libertarian, according to reporting by The Wall Street Journal, and he has long been critical of aggressive financial regulation.  Atkins’s role signals that the SEC will not likely follow the Labor Department’s footsteps in promulgating a tougher fiduciary duty rule. Atkins criticized the Labor Department rule, stating in a 2015 congressional hearing that the Labor Department “should go back to the drawing board.” Speculation is rampant about other potential changes, including scaling back corporate auditing requirements, shifting SEC focus from large corporate penalties to holding individuals accountable, and requiring whistleblowers to first report to their companies (for which Atkins advocated in 2011).

Answering those questions during his confirmation hearing is Trump’s selection to chair the SEC: corporate attorney Jay Clayton. Clayton is a partner with Sullivan & Cromwell in New York focusing on M&A and capital raising, along with representing clients in regulatory and enforcement actions. Commentators view this pick as signaling a shift in focus away from enforcement to other SEC goals. Critics note Clayton has spent years as a “Wall Street insider,” but outgoing Chair Mary Jo Wright praised Clayton as “very smart, very thoughtful, very knowledgeable of the markets and the securities laws and I think a terrific person.” Regardless, the general trend appears to be friendlier to Wall Street. Anthony Scaramucci, a hedge fund manager advising the transition team, said the new head of the SEC needed to “get back to reffing the game properly and end the demonization of Wall Street.”

Finally, the Director of the Consumer Financial Protection Bureau (created by Dodd-Frank), Richard Cordray, may be forced to step down under Trump, despite language in Dodd-Frank preventing the CFPB director’s removal except for cause. The statute creating the CFPB prohibits removal of the director of the agency except for cause during his five-year term, which would insulate the director from political change. In October, however, the D.C. Circuit Court of Appeals held that structure unconstitutional because it gave too much power and autonomy to the sole director. The Obama administration is appealing that ruling, but some legal scholars believe Trump can simply withdraw the appeal after his inauguration, leaving the D.C. Circuit’s ruling intact and allowing Trump to immediately remove Cordray. Trump certainly seems open to firing Cordray, as he met with Representative Randy Neugebauer from Texas, a strong CFBP critic, about possibly replacing Cordray.

State—Regulators Fear Federal Preemption of Enforcement

Paul Atkins has also allegedly been discussing “ways to ensure that federal securities laws preempt state [Blue Sky] laws” such as the New York Martin Act, as reported by Fox Business. This news, along with Trump’s comments regarding Dodd-Frank, has prompted state regulators to push back and assert their authority. “You need a national regulator; and if they can’t, the states need to do the job and should,” said William Galvin, secretary of the commonwealth of Massachusetts. “It sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated,’” Galvin explained. “I think that’s a problem.”

Other state regulators have echoed Galvin’s sentiments. Mike Rothman, Minnesota’s commerce commissioner and president of the North American Securities Administrators Association, commented: “Any attempt to weaken the investor protections provided by state ‘Blue Sky’ laws would erode investor confidence and remove a vital first line of defense for all investors working to provide a secure future for themselves and their children.” And New York Attorney General Eric Schneiderman warned that “any attempt to gut these consumer and investor protections would severely undercut state police powers and only embolden those who seek to defraud and exploit everyday Americans.” “At a time of regulatory uncertainty at the federal level, it is essential that we maintain the very laws that have helped state and local law enforcement keep consumers and investors safe for over one hundred years,” he said. Schneiderman’s office recently reached a $25 million settlement agreement in New York’s case against Trump University for violation of state education laws, among other things.


The Supreme Court has unanimously affirmed the Ninth Circuit’s decision to uphold the conviction of a tippee for insider trading based on tips he received from his brother-in-law, even though the tipper did not receive a financial benefit for passing the tips, because the tips were passed to the tipper’s relatives.  In Salman v. United States, the tipper was an investment banker in Citigroup’s healthcare investment banking section.  The tipper had a close relationship with his older brother, and the tipper shared inside information about pending mergers and acquisitions with him.  Without the tipper’s knowledge, the older brother then shared the inside information with the tipper’s brother-in-law, who became the tippee.  The tippee knew the inside information was coming from his brother-in-law, fed through the older brother.  Based on the inside information, the tippee made over $1.5 million in profits that he split with another relative.  The tippee was indicted on four counts of securities fraud and one count of conspiracy to commit securities fraud.  A jury convicted the tippee, and he appealed to the Ninth Circuit, which affirmed the conviction.  The tippee then appealed to the Supreme Court, and pointing to a 2014 decision from the Second Circuit, United States v. Newman, the tippee argued that his conviction could not stand because the tipper did not receive a financial benefit for the tips.    

Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 prohibit individuals who are under a duty of trust and confidence from tipping inside information to others for trading.  The recipient of the information then may commit securities fraud by trading on the inside information if the recipient knows the information was shared in breach of the tipper’s duty of trust and confidence.  The tippee is exposed to liability when he participates in the tipper’s breach of a fiduciary duty, which occurs when the tipper discloses the inside information for a personal benefit.  In Dirks v. SEC, the Supreme Court explained that a jury can infer a personal benefit when the tipper receives something in value for the tip or when the tipper “makes a gift of confidential information to a trading friend or relative.”  463 U.S. 646, 664 (1983).

In Salman, the Supreme Court relied on this language from Dirks to conclude that the tipper made a gift of confidential information to a relative (his older brother) and that the tippee knew the tipper made such a gift of inside information.  Accordingly, the jury could infer that the tipper received a personal benefit, and thus the tippee shared in the breach of the tipper’s fiduciary duty, exposing him to liability.  In the Court’s view, making a gift of inside information to a relative is no different than the tipper trading on the inside information himself and then giving the profits to the tippee.  In either case, the tipper receives a reputational benefit or perhaps a quid pro quo from the tippee.

The Supreme Court’s holding is mostly a straightforward application of its language from Dirks, but in passing the Court explained that to the extent the Second Circuit’s decision in Newman required that the tipper also receive something of a “pecuniary or similarly valuable nature’ in return for the gift of information to friends or family, that it was inconsistent with its holding in Dirks.  773 F.3d 438, 452 (2d Cir. 2014).  In Newman, the tippees were “several steps removed” from the tippers, and there was no evidence that they knew the information they traded on was inside information or that the tippers received a personal benefit in exchange for the information so as to distinguish the Newman case from the situation in Salman.  The Salman court chose not to elaborate beyond on the straightforward facts of this case or provide any guidance on who would qualify as a friend or relative under the Dirks test, leaving the issue open to be litigated in future lawsuits.


Last month, a federal judge in Austin dismissed a securities fraud class action brought against EZCorp, Inc. and its CFO alleging that the defendants made false and misleading statements that overstated EZCorp’s net income and misrepresented the nature of certain loan sales by improperly recording the sales as gains. The co-lead plaintiffs alleged the defendants violated Section 10(b) of the Securities Exchange Act of 1934, and to prevail under a Section 10(b) claim, the plaintiff must plead that the defendant made the misrepresentation or omission with scienter. To satisfy the scienter element, the co-lead plaintiffs alleged, in part, that EZCorp overstated its net income by 52.9% in FY 2013, 29.4% in FY 2014, and 31% in the first quarter of 2015; that confidential witnesses would testify that the CFO knew of the inaccuracies surrounding the accounting issues; and that the CFO received a $350,000 bonus for his role in the loan sales.

The Court determined that the 52.9%, 29.4%, and 31% overstatements, while high, were merely “some basis from which to infer scienter” because accounting violations are insufficient in and of themselves to establish scienter. As to the confidential witness statements, the Court explained that allegations from confidential witnesses must be viewed with some level of skepticism and that the statements at issue failed to establish that the confidential witnesses had personal knowledge of the events at issue, made vague allegations, and failed to provide certain specifics, such as when and where a key conversation occurred. Finally, as to the CFO’s bonus, the court determined that the alleged desire to increase compensation did not support a strong inference of scienter standing alone, especially because the $350,000 bonus was not a bonus of an extraordinary amount.

The Court dismissed the case without prejudice and provided the co-lead lead plaintiffs the opportunity to file an amended complaint. The case is styled, Huang & Rooney v. EzCorp, Inc. & Kuchenrither, No. A-15-CA-00608-SS.


Late last month the Department of Justice Antitrust Division and the Federal Trade Commission jointly issued ANTITRUST GUIDANCE FOR HUMAN RESOURCE PROFESSIONALS. The Guidance, written in plain English rather than antitrust jargon, “is intended to alert human resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of antitrust laws.” The release doesn’t break new ground in terms of antitrust principles; instead, it serves as a reminder that those who hire employees and set compensation are subject to the same antitrust rules and potential penalties—including treble damages in civil actions and possible criminal liability—as those who compete in the sale of products. “From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services."

The Guidance offers two broad admonitions:

  1. “Agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.”
  2. “Avoid sharing sensitive information with competitors.”
As to the first, the agencies warn that, “Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.” As to the second, the agencies explain, “Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information [such as current or planned wage decisions] could serve as evidence of an implicit illegal agreement.”

The Guidance includes several pages of questions and answers designed to put real-world “meat” on the bones of the antitrust principles discussed earlier in the pronouncement. These illustrate both how an HR professional might unwittingly violate the law and ways that violations can be avoided. The repeated warnings about potential criminal liability should be taken to heart, particularly in light of the DOJ’s recent focus on individual responsibility and accountability, crystallized in the “Yates Memo” last fall. The Guidance should be required reading for any HR professional.


Last month, the SEC released its enforcement results for fiscal year 2016, which ended September 30, 2016. In FY 2016, the SEC filed a record 868 enforcement actions, a 7.5% increase from FY 2015. It was also the third straight year that the number of enforcement actions filed by the SEC increased from the prior year. The 868 enforcement actions included a record number of enforcement actions involving investment advisors and investment companies (160 enforcement actions) and a record number of Foreign Corrupt Practices Act-related enforcement actions (21 enforcement actions).

The SEC reported that it obtained over $4 billion in disgorgement and penalties, which is consistent with the amount obtained in disgorgement and penalties for the two previous fiscal years.  The SEC also reported that it distributed a record $57 million to whistleblowers in FY 2016.

The SEC used the opportunity to note its success in “first-of-their-kind” actions, which included actions against a firm solely based on its failure to file Suspicious Activity Reports, against an audit firm for auditor independence failures based on personal relationships, and against a private equity advisor for acting as an unregistered broker. The Director of the SEC’s Enforcement Division also noted groundbreaking insider trading and FCPA cases, and the SEC’s press release detailed four favorable jury verdicts in U.S. District Court in FY 2016. The full press release is available here: https://www.sec.gov/news/pressrelease/2016-212.html.