Earlier this week, the Supreme Court handed down its ruling in Liu v. Securities and Exchange Commission, No. 18-1501. This ruling is significant for two reasons. First, it resolves the previously unsettled question as to whether the SEC is empowered to seek a disgorgement award. The SEC is. Second, it explains limits upon disgorgement awards necessary to ensure it is not an improper penalty. 

As you may know, disgorgement is an equitable remedy intended to deprive wrongdoers of the net profits of unlawful conduct. The SEC often seeks a disgorgement award in connection with securities fraud claims. In the 2017 case of Kokesh v. SEC, the Supreme Court found disgorgement to be a penalty for statute of limitations purposes, but did not go so far as to decide whether disgorgement could still be imposed as a form of equitable relief. Equitable relief has generally not permitted recovery that would be punitive. This left a big question for the SEC and defendants alike. Can the SEC keep seeking disgorgement in these cases?

In this case, appellants challenged a $27 million award of disgorgement stemming from a visa scheme as an improper penalty. While the Supreme Court vacated the disgorgement award and remanded for further proceedings, it reaffirmed that the SEC had authority to seek disgorgement and explained certain restrictions on that recovery to ensure it is correctly calculated and used to reimburse victims of the fraud found in the lawsuit. More specifically, the Supreme Court clarified that courts must consider factors including what the actual profits from the fraud net of “legitimate expenses” are as well as ensuring that the money awarded is actually returned to defrauded investors and not the SEC.

This is a partial win for both the SEC and defendants against whom the SEC seeks disgorgement. For the SEC, it can still seek disgorgement, which has been a vital tool in its tool belt for enforcement in recent years. For defendants, they are now armed with significant arguments to limit the amount of disgorgement awarded. It remains to be seen exactly how or to what extent this will impact securities litigation, but for now we expect the SEC to continue pursuing and receiving disgorgement awards, but the size of those awards to shrink under the Supreme Court’s new guidance of what is necessary to avoid constituting an improper penalty.


In a Public Statement issued by the SEC, Chairman Jay Clayton and Division of Corporate Finance Director William Hinman urged public companies to include corporate disclosures related to the effects of COVID-19 in their “quarterly earnings releases and analyst calls, as well as in subsequent communications to the marketplace.” The SEC requested that corporate disclosures address: “(1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as [ ] efforts to fight COVID-19 progress.” Suggested disclosures include, “[d]etailed discussions of current liquidity positions,” “expected financial resource needs,” “efforts to protect worker health and well-being and customer safety,” and “financial assistance received under the CARES Act or other similar COVID-19 related federal and state programs.”

The SEC acknowledged that “providing detailed information regarding future operating conditions and resource needs is challenging . . . but is important on many levels.” For investors, forward-looking COVID-19 disclosures foster more well-reasoned investment decisions. For the market more-generally, such disclosures “enhance valuable communication and coordination across our economy—Including between the public and private sectors." And for the greater fight against COVID-19, such disclosures increase confidence and understanding about particular business and industries which, in turn, “reduces risk aversion and facilitates action.” As an example of this third, “less familiar” policy consideration, the SEC explained, for example, that “if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees.”

The SEC warned that even though “it may be tempting to resort to generic, or boilerplate, disclosures,” such disclosures “do little to inform investors.” Instead, the SEC urged companies to convey “meaningful information” that give investors “a level of insight that allows them to see the key operation and financial considerations and challenges the company faces through the eyes of management” even though such information will be “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company.”

Of course, companies are typically cautioned to limit the forward-looking disclosures—they are discouraged from making forward-looking financial estimates. Recognizing this, the SEC stated that companies should still try their best to make forward-looking disclosures related to COVID-19 and to “avail themselves of the safe-harbors” found in Section 27A of the Securities Act and Section 21E of the Exchange Act. In effect, companies should avoid making boilerplate COVID-19 disclosures, but should identify them as “forward-looking statement[s]” and couple them with customary “cautionary statements identifying factors that could cause actual results to differ materially from those in the forward-looking statement.”

The SEC concluded by assuring public companies that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.” Nevertheless, the SEC continues to closely monitor markets for fraud relating to COVID-19, suspending trading of stock for companies making questionable claims. See, e.g., Predictive Tech. Group, Inc., SEC Order of Suspension of Trading, File No. 500-1 (April 21, 2020) (suspending trading “because of questions regarding . . . statements PRED made about being able to immediately distribute large quantities of serology tests to detect the presence of COVID-19 antibodies”). The best course remains for public companies to follow the SEC’s guidance in order to inform their investors, assure markets, assist in the nation-wide fight against COVID-19, and ultimately protect themselves from enforcement actions and shareholder litigation.

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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.