“SLAPPING” SECTION 11 CLAIMS IN TEXAS STATE COURT

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.

EARLY TAKEAWAYS FROM SECTION 11 CASES FILED IN TEXAS STATE COURT Section

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.

DISSEMINATING FALSE STATEMENTS CAN LEAD TO PRIMARY LIABILITY UNDER RULE 10B–5

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.

SEC ISSUES ORDER ADDRESSING HOW IT WILL PROCEED WITH PENDING ADMINISTRATIVE ACTIONS

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.

SUPREME COURT NARROWLY DEFINES “WHISTLEBLOWER” FOR PURPOSES OF DODD-FRANK ACT

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.

NEW FEDERAL SECURITIES CLASS ACTIONS UP 44% IN 2017

Securities class action filings in federal court were up 44% in 2017, according to a report just released by National Economic Research Associates (“NERA”) entitled, “Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review.” In 2017, plaintiffs filed 432 new federal securities class actions, which is a 44% increase from the 300 new federal securities class actions filed in 2016. The 432 new federal securities class action filings are the most since 2001, and this is the third straight year that the number of federal securities class actions has increased. The 432 new federal securities class action suits involved approximately 8.2% of publicly traded companies, nearly double the rate seen in 2014.

Of those 432 new class actions filed in 2017, twenty were filed in district courts located within the Fifth Circuit, three more than were filed in the Fifth Circuit in 2016. This accounted for approximately 5% of the nationwide securities class actions. Although the Fifth Circuit saw slightly increased numbers in 2017, the circuits with the most filings continue to be the Second (97 new filings in 2017), the Ninth (89 new filings in 2017), and the Third (85 new filings in 2017). Filings in the Third Circuit more than doubled from 2016, with the majority of the new filings being merger-objection filings. Nationwide, federal merger-objection filings more than doubled for the second consecutive year and accounted for 46% of the new filings. This increase may be the result of the Delaware Court of Chancery’s In re Trulia, Inc. Stockholder Litigation decision, which changed the standard for approval of disclosure only settlements in Delaware, driving these lawsuits into federal court. Outside of the merger-objection context, the most frequently asserted claim was a 10b-5 claim, which was asserted in 47% of the new filings.

In 2017, the health care (26%), technology (14%), and financial services (13%) sectors continued to be the three most frequently targeted industries for newly filed securities class action lawsuits. Foreign-based companies were the subject of 55 new securities class actions, a 25% increase over flings against foreign-based companies in 2016. Whether the upward trend of federal securities class action filings will continue into 2018 likely depends on whether merger-objection cases continue to be filed in federal court in increasing numbers.

The full NERA report may be found at here.

SUPREME COURT WILL REVIEW APPOINTMENT REQUIREMENTS FOR SEC’S IN-HOUSE FORUM

The U.S. Supreme Court granted certiorari in Raymond J. Lucia Companies, Inc. v. SEC, No. 17-130, agreeing to review the D.C. Circuit’s 2016 decision that the SEC’s administrative forum’s use of Administrative Law Judges (“ALJs”)—who are not directly appointed by the President or the SEC commissioners—does not violate the Constitution’s Appointments Clause. In doing so, the Court will resolve a circuit split between the D.C. Circuit and the Tenth Circuit, which ruled in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), that the ALJs are subject to the Appointments Clause. The case will turn on whether the SEC’s ALJs qualify as “inferior Officers” and thus must be appointed by the President, a head of department, or a court, or if the ALJs are merely employees who may be appointed like any other governmental agency employee. In determining that the ALJs were employees, the D.C. Circuit relied heavily on the fact that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case.

In November, the Justice Department filed a brief with the U.S. Supreme Court in which it reversed course and argued that the ALJs are subject to the Appointments Clause and that it would not be defending the D.C. Circuit’s decision. The U.S. Supreme Court has invited an outside lawyer to serve as amicus curiae and defend the D.C. Circuit’s decision. In response to the Justice Department’s new position on the matter, the SEC issued an order saying that the Commission, through the commissioners, ratified the prior appointment of the ALJs. While that action may remedy the problem for new cases moving forward, it is unclear what impact it may have on prior decisions. The date for oral argument has not yet been set.

SECURITIES ACT OF 1933 STATUTE OF REPOSE NOT SUBJECT TO TOLLING BY FILING OF CLASS ACTION COMPLAINT

Section 11 of the Securities Act of 1933 gives purchasers of securities a cause of action when there are misrepresentations in a registration statement. Section 13 states, in part, that: “In no event shall any such action be brought to enforce a liability created under section [11] of this title more than three years after the security was bona fide offered to the public . . . .” In California Public Employees’ Retirement System v. ANZ Securities, Inc., the Supreme Court held that this portion of Section 13 is a statute of repose that is not subject to tolling by the filing of a class action complaint.

CalPERS purchased Lehman Brothers Holdings, Inc.’s securities through public offerings in 2007 and 2008. Shortly after Lehman Brothers filed for bankruptcy in September 2008, a putative class action was filed alleging securities violations based on the sale of Lehman Brothers stock in the 2007 and 2008 public offerings. The putative class action was consolidated with other securities suits brought against Lehman Brothers in a single multidistrict litigation. In February 2011, which was more than three years after the relevant CalPERS’s purchases, CalPERS filed a separate complaint alleging identical securities law violations as the class action complaint. CalPERS’s individual suit was consolidated with the multidistrict litigation. When the putative class action settled, CalPERS opted out of the class, choosing instead to pursue its individual suit. The defendants then moved to dismiss CalPERS’s individual suit, arguing that the Section 11 violations were untimely under the three-year exclusion period in Section 13. CalPERS responded that that the three-year exclusion period was tolled during the pendency of the class action lawsuit and relied on the tolling of a different statute of limitations established in American Pipe & Construction Co. v. Utah. The district court disagreed and dismissed CalPERS’s lawsuit. The Second Circuit affirmed and the Supreme Court granted certiorari.

Justice Kennedy authored the Court’s opinion and affirmed the Second Circuit. The Court began by analyzing whether the language in Section 13 is a statute of repose or a statute of limitations. A statute of limitations is designed to encourage a plaintiff to diligently pursue claims and begins to run when the claim accrues. In contrast, a statute of repose is designed to provide a defendant with certainty that it is free of liability after a certain time and begins to run on the date of the defendant’s last culpable act or omission. The three-year period in Section 13 is a statute of repose because it runs from the date of the defendant’s last culpable act, and because its explicit language, “[i]n no event,” creates a set bar against any future liability.

The Court then explained that a statute of repose is not subject to equitable tolling. Instead, a statute of repose can only be tolled when there is “a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances.” Examples of this legislative indication can be found in certain statutes of repose (e.g., 29 U.S.C. § 1113). But there is no such legislative indication in Section 13. The Court then easily rejected CalPERS principal argument that the three-year period in Section 13 was tolled during the pendency of the class action lawsuit because the American Pipe tolling CalPERS sought to apply to the statute of repose was equitable tolling. And in contrast to Section 13’s statute of repose, the statute that was tolled in American Pipe was a statute of limitations, which can be tolled through equitable tolling. Accordingly, the Court affirmed the dismissal of CalPERS’s Section 11 claims as untimely.

The Court’s decision provides securities litigation defendants with certainty about the exact time when potential liability for Section 11 claims will be extinguished. Plaintiffs, on the other hand, now know that they must timely file separate protective actions during the pendency of a class action if they wish to preserve the choice of opting-out of the class action.

SUPREME COURT UNANIMOUSLY RULES THAT SEC SOUGHT DISGORGEMENT IS A “PENALTY” SUBJECT TO A FIVE-YEAR STATUTE OF LIMITATIONS

In Kokesh v. SEC, the Supreme Court determined that the five-year statute of limitations for any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” in 28 U.S.C. § 2462 applies to claims for disgorgement sought by the SEC as a sanction for violations of the federal securities laws. On October 4, 2009, the SEC brought an enforcement action against Kokesh based on his alleged violations of the securities laws between 1995 and 2009. After a jury found Kokesh liable, the district court imposed a civil penalty based solely on Kokesh’s conduct after October 4, 2004, concluding that the five-year statute of limitations in 28 U.S.C. § 2462 precluded any civil penalty based on Kokesh’s conduct five years before the SEC brought suit. The district court, however, ordered Kokesh to disgorge $34.4 million based on violations going all the way back to 1995—with $29.9 million of that amount resulting from violations before October 4, 2004—because the district court reasoned that disgorgement is not a penalty to which 28 U.S.C. § 2462 applied. The Tenth Circuit affirmed, and the Supreme Court granted certiorari.

Justice Sotomayor, writing for a unanimous court, concluded otherwise. She relied on a 1892 Supreme Court case that defined “penalty” as “punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.” Huntington v. Attrill, 146 U.S. 657, 667 (1892). From this definition, Justice Sotomayor distilled two principles. First, a penalty redresses a wrong to the public. Second, a penalty is intended to punish and to deter others from committing similar offenses, as opposed to compensating the victim. The Supreme Court reasoned that the disgorgement sought by the SEC is a remedy for violations of public laws against the United States, as opposed to violations against the aggrieved individual. Furthermore, disgorgement is punitive because it is primarily intended to deter violations of the federal securities laws “by depriving violators of their ill-gotten gains.” The Supreme Court noted that in many instances the disgorged funds do not compensate the victims, such as instances when it is not feasible to identify them. Based on the two principles distilled from the definition of penalty, the Supreme Court concluded that SEC sought disgorgement falls within the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement goes beyond compensation and is intended to punish wrongdoers for violating public laws. Kokesh v. SEC, No. 16-529, 2017 WL 2407471 (2017).

GORSUCH MAY BRING TO SUPREME COURT SKEPTICISM OF PRIVATE SECURITIES LITIGATION AND OF JUDICIAL DEFERENCE TO SEC

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.

SUPREME COURT AFFIRMS CONVICTION FOR TIPPEE IN INSIDER TRADING CASE

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.

SECURITIES CLASS ACTION DISMISSED FOR FAILURE TO ADEQUATELY PLEAD SCIENTER—FINANCIAL RESTATEMENTS AND CONFIDENTIAL WITNESS STATEMENTS INSUFFICIENT

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.

SEC ENFORCEMENT ACTIONS RISE FOR THE THIRD STRAIGHT YEAR

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.

D.C. CIRCUIT RULES THE SEC’S IN-HOUSE FORUM IS CONSTITUTIONAL

Multiple federal circuit courts have previously ruled that they did not have jurisdiction to hear a collateral challenge to the constitutionality of the SEC’s administrative proceedings before an Administrative Law Judge (“ALJ”) and that the respondents must raise challenges to the forum’s constitutionality as an appeal after the administrative proceeding concludes. In Raymond J. Lucia Companies, Inc. v. SEC, however, the D.C. Circuit became the first federal appellate court to consider the merits of the issue and concluded that the SEC’s administrative forum’s use of ALJs—who are not appointed by the President—does not violate the Appointments Clause, which requires the President to appoint all “Officers of the United States.”

The SEC instituted an administrative action against Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (“petitioners”) alleging violations of the Investment Advisers Act of 1940. An ALJ heard the case, concluded that the petitioners were liable based on one of the four charged misrepresentations, and imposed sanctions. The SEC granted a petition for review, found that the petitioners committed anti-fraud violations, imposed the same sanctions as the ALJ, and concluded that its ALJs are employees, not Officers, and that their appointment did not violate the Appointments Clause. Petitioners then sought review with the D.C. Court of Appeals, which agreed with the SEC’s determination.

The D.C. Circuit explained that the Appointments Clause applies to judicial Officers but not employees or other “lesser functionaries,” and that an appointee is only an Officer if he or she exercises “significant authority pursuant to the laws of the United States.” The criteria for determining whether an appointee is an Officer are: “(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.” The D.C. Circuit determined that the SEC’s ALJs do not issue final decisions and thus cannot be Officers within the meaning of the Appointments Clause.

The D.C. Circuit agreed with the SEC that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case. The D.C. Circuit relied heavily on its 2000 decision in Landry v. FDIC, which held that ALJs of the FDIC were not Officers because they could only issue “recommending decisions” that are then forwarded to the FDIC Board of Directors for a final decision. After determining that the SEC’s use of ALJs passed constitutional muster, the D.C. Circuit also affirmed the finding of liability and lifetime industry bar sanction against the petitioners.

View the opinion - Raymond J. Lucia Companies, Inc. v. SEC, No. 15-1345, 2016 U.S. App. LEXIS 14559 (2d Cir. Aug. 9, 2016).

2016 SECURITIES CLASS ACTIONS CONTINUE TO RISE

Cornerstone Research recently released its “Securities Class Action Filings: 2016 Midyear Assessment,” which tracks the number and type of securities class action lawsuits filed nationwide each semiannual period. In the first half of 2016, plaintiffs filed 119 new federal securities class actions nationwide, which is a 17% increase from the 102 new federal securities class actions filed in the second half of 2015 and a 38% increase from the 87 new federal securities class actions filed in the first half of 2015. The number of filings in the first half of 2016 is also above the historical average of 94 new federal securities class actions filed each semiannual period between 1997 and 2015.

Of those 119 new federal securities class actions filed in 2016, only four were filed in district courts located within the Fifth Circuit, which is down from the 10 that were filed in the Fifth Circuit in the second half of 2015. The Fifth Circuit filings accounted for approximately 3% of the nationwide federal securities class actions, down from the 6% historical trend, between 1997 and 2015. The Ninth Circuit continued to lead the way with 38 new federal securities class actions filed within its district courts, 9 more than were filed in the second half of 2015. Filings in the Second Circuit were also up significantly as compared to the two previous semiannual periods.

In the first half of 2016, new federal securities class actions filed against companies in the financial, consumer, and industrial sectors increased as compared to second half of 2015. In contrast, there were fewer new federal securities class actions filed against technology, communications, energy, and utilities firms than in the previous semiannual period. Click to view the full Cornerstone Research report.

DELAWARE CHANCERY COURT DETERMINES PERSONAL BENEFIT TO NAMED PLAINTIFF PRECLUDES SETTLEMENT APPROVAL

Earlier this year, the Chancery Court of Delaware denied approval of a proposed settlement of a derivative action based solely on a personal benefit the named plaintiff was to receive. Plaintiff Marvin Smollar brought a derivative action on behalf of VitalSpring Technologies, Inc. in an attempt to remedy certain alleged corporate governance failures. The parties reached a settlement of the litigation, and Smollar was able to achieve “much of, it not most of, the relief which he sought,” including a shareholder’s meeting, the appointment of two independent directors and a special review committee, and the hiring of an independent auditor. In addition to that relief, the settlement agreement also afforded Smollar the opportunity to sell back his VitalSpring shares at the price he paid for the stock. This was a unique and personal benefit not afforded to VitalSpring’s other shareholders, and it was especially beneficial to Smollar because there is little opportunity to trade in VitalSpring stock due to the federal securities laws and certain provisions in VitalSpring’s stock purchase agreement. In fact, counsel for neither party could identify a sale of VitalSpring stock within the last year.

Despite the fact that the settlement was recommended by the special review committee and the board of directors and generally supported by a majority of VitalSpring’s shareholders (eleven shareholders objected to Smollar’s personal benefit), the Chancery Court denied approval based on Smollar’s equity buy-back. The court explained that its task in assessing a proposed settlement is to determine whether the settlement is fair and reasonable and that an award of disparate benefits to the representative plaintiff, who owes a fiduciary duty to other shareholders, “will be closely scrutinized by the Court.” The court rejected Smollar’s argument that the settlement should be approved because the bulk of the settlement benefits were obtained through his efforts even before his equity buy-back was negotiated. Instead, the court characterized the buy-back as “self-dealing” that “drifts far from the conduct expected of a fiduciary” and distinguished a case where the named plaintiff’s personal benefit also resulted in a corporate benefit, unlike in this case. Even though the special committee and board of directors recommended the proposed settlement, the court believed that they did not properly assess how Smollar’s personal benefit discredited the fairness and reasonableness of the settlement and denied approval.

The case remains pending and illustrates the limitations on what benefits can be given to a named plaintiff who chooses to prosecute a derivative claim under Delaware law. Smollar v. Potarazu, C.A. No. 10287-VCN, 2016 Del. Ch. LEXIS 4 (Jan. 14, 2016

2015 SECURITIES CLASS ACTIONS UP TO HIGHEST LEVEL SINCE 2008

Cornerstone Research recently released its “Securities Class Action Filings: 2015 Year in Review,” which tracks the number and type of securities class action lawsuits filed nationwide each year. In 2015, plaintiffs filed 189 new federal securities class actions, which is an 11% increase from the 170 new federal securities class actions filed in 2014. The 189 new federal securities class action filings is the largest number of filings since 2008, and is right in line with the historical average of 188 new class actions filed each year between 1997 and 2014. Notably, it is the third straight year that the number of federal securities class actions has increased. Of those 189 new class actions filed in 2015, fifteen were filed in district courts located within the Fifth Circuit, three more than were filed in the Fifth Circuit in 2014. This accounted for approximately 8% of the nationwide securities class actions, which is slightly higher than the 6% historical trend, between 1997 and 2014.

Although the Fifth Circuit saw slightly increased numbers in 2015, by far the largest increase by circuit occurred in the Ninth Circuit, which saw 28 more federal securities class actions filed within its district courts in 2015 than were filed in 2014. This increase is likely the result of increased filings against technology firms. In 2015, technology firms saw ten more class actions filed against them than in 2014. Filings against industrial and communication firms also increased substantially in 2015. Federal securities class actions brought against foreign-headquartered companies accounted for 18.5% of all filings in 2015, consistent with numbers from the last three years.

The vast majority (84%) of securities class action lawsuits filed in 2015 asserted a Rule 10b-5 claim. The next most frequently asserted claim was a Section 11 claim, which was asserted in 15% of the filings. As recently as 2013, only 9% of securities class action filings asserted a Section 11 claim. This increase in Section 11 claims likely corresponds with increased IPO activity over the last three years, which saw 481 IPOs conducted in that timespan. Significantly, Cornerstone Research found that companies that conducted IPOs between 2009 and 2014 face litigation at increased rates than companies that conducted IPOs prior to the 2008 financial crisis. In fact, in 2015, 4% of all U.S. Exchange-Listed Companies were subject to a federal securities class action. That is the highest percentage since Cornerstone Research began compiling data in 1997. With federal securities class actions continuing their upward trend in 2015, there is no reason to expect anything different in the coming year. Click to view the full Cornerstone Research report.

HIGH FREQUENCY TRADING SUIT DISMISSED FOR FAILURE TO STATE A CLAIM

Following the release of Michael Lewis’s book about high frequency trading, Flash Boys: A Wall Street Revolt, multiple putative class action lawsuits were filed against the stock exchanges relating to their agreements with certain traders that permitted high frequency trading. Recently, a federal judge for the Northern District of Illinois followed the Southern District of New York’s lead and dismissed one such lawsuit, concluding that the investors failed to state actionable claims in Braman v. CME Group, Inc.

High frequency trading uses sophisticated computer algorithms to engage in trades at extremely high-speeds, and without human intervention, so as to exploit small changes in stock prices before other market participants are even aware of the price changes. High frequency traders often enter into “co-location agreements” with the stock exchanges that allow the high frequency traders to place their computer servers at the same location as the stock exchanges’ servers, which in turn allows the high frequency traders to access price data and place orders milliseconds faster than other market participants. This difference in the time between when a high frequency trader can see the data and make a trade and when other market participants have access to the data is known as the “latency loophole.” This latency loophole gives high frequency traders the chance to place buy or sell orders based on advanced notice (of only a few milliseconds) of which way a stock price is moving.

The plaintiffs in Braman alleged that the Chicago Board of Trade and the Chicago Mercantile Exchange (the “exchange defenants”) entered into agreements with high frequency traders that gave the traders exclusive advantages that were concealed from other traders, effectively creating a two-tiered trading structure that permitted the high frequency traders to engage in predatory tactics. The Braman plaintiffs brought a putative class action and alleged causes of action for violations of the Commodity Exchange Act (the “CEA”) and the Sherman Antitrust Act, fraud, and unjust enrichment. The district court determined that the plaintiffs’ allegations failed to state a manipulation claim under Section 9 of the CEA because any artificial effect on the market would have been caused by the high frequency traders, not by the exchange defendants or any of their co-location agreements. In other words, without the actual trades by the high frequency traders, there would have been no impact on the market. In doing so, the district court relied heavily on a recent opinion from the Southern District of New York, In re Barclays Liquidity Cross and High Frequency Trading Litigation, which considered a similar lawsuit brought against seven stock exchanges, including the New York Stock Exchange and NASDAQ, and determined that the alleged activity did not violate Sections 10(b) or 6(b) of the Securities Exchange Act.

The district court also concluded that the Braman plaintiffs failed to state an actionable false information claim under the CEA because the exchange defendants made no false statement to the Commodity Futures Trading Commission, and the plaintiffs failed to allege that the exchange defendants knew that any high frequency trader was violating the CEA to give rise to an aiding and abetting claim under the act. Plaintiffs’ fraud claim failed because the alleged fraudulent representation that all traders receive data “from one pipe” was technically true. As to plaintiffs’ antitrust claims, they also failed because the plaintiffs did not show any unreasonable restraint on trade—in fact, the agreements between the high frequency traders and the exchange defendants actually promoted trade—or any barriers to entry that existed for the exchange defendants’ competitors. While high frequency trading may face continued scrutiny from government regulators, such as the SEC, the Commodity Futures Trading Commission, and the Department of Justice, the Braman and Barclays decisions demonstrate that private lawsuits brought against the stock exchanges themselves will have to allege more than just an environment of high frequency trading if they are to be successful.

SEC RELEASES ENFORCEMENT RESULTS AMID CONTINUED CRITICISM OF ITS ADMINISTRATIVE PROCEEDINGS

On October 22, 2015, the SEC released its enforcement results for fiscal year 2015, which ended September 30, 2015. In FY 2015, the SEC filed a record 807 enforcement actions, a nearly 7% increase from FY 2014. It was the second straight year that the number of enforcement actions filed by the SEC increased from the prior year. The SEC also obtained approximately $4.19 billion in disgorgement and penalties, which is up from fiscal years 2014 and 2013. The SEC also used the opportunity to trumpet its success in “first-of-their-kind” cases, which included actions against a private equity advisory for misallocating “broken deal” expenses, against an underwriter for pricing-related fraud in the primary market for municipal securities, and against a financial institution for FCPA violations.

In the release, the SEC noted that it “[w]on all six U.S. District Court jury or bench trials in fiscal year 2015 and enjoyed strong success in administrative proceedings,” but this fact is unlikely to cool the continued debate about the SEC’s growing use of its administrative proceedings in place of civil actions in federal court. On the same day the SEC released its enforcement results, Representative Scott Garrett of New Jersey, chairman of the House’s Financial Services Subcommittee on Capital Markets, introduced H.R. 3798, the Due Process Restoration Act. Representative Garrett explained that the proposed bill would “rein-in the [SEC’s] controversial overuse of in-house administrative law judges” by giving defendants a mandatory right to opt out of the SEC’s in-house administrative proceedings by removing the case to federal court. For cases that proceed as an administrative proceeding, the proposed bill would raise the burden of proof to clear and convincing evidence.

Less than a month ago, the SEC introduced its own proposed amendments to its Rules of Practice governing its administrative proceedings, perhaps as a way to address many of the public concerns surrounding its administrative proceedings. The SEC’s proposed rules would allow the parties to take a limited number of witness depositions, even if the deponent could testify at trial; would extend the time before a hearing in certain cases; and would include a handful of other proposed changes relating to appeals and electronic filing. The public comment period on the SEC’s proposed rules ends December 4, 2015, although it appears that the debate on the issue is far from over.

SEC GUIDANCE SUPPORTS PROTECTION FOR INTERNAL WHISTLEBLOWERS

On August 4, 2015, the SEC released a rule interpretation supporting its view that whistleblowers who report possible wrongdoing internally within their company and not to the SEC, qualify for anti-retaliation protection under the Dodd-Frank Act. The Dodd-Frank Act protects 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). One of the enumerated protected activities is a catchall provision that protects individuals who make disclosures that are required or protected under certain laws, which covers reporting possible wrongdoing internally. Inconsistently, however, 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).

The SEC’s rule interpretation establishes that, in its view, for purposes of qualifying for anti-retaliation protection, an individual’s status as a whistleblower does not depend on whether the individual reported the information to the SEC. The SEC based its decision on the fact that the broad reporting catchall provision is within the employment retaliation section and that its interpretation supports the SEC’s overall goals in implementing the whistleblower program by encouraging individuals to report possible wrongdoing.

The SEC’s interpretation is directly at odds with the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., in which the court held that the plain language of the statute creates a cause of action only for whistleblowers who report information to the SEC. 720 F.3d 620, 623 (5th Cir. 2013). As the Fifth Circuit noted, extending anti-retaliation protection to internal whistleblowers renders the Sarbanes-Oxley anti-retaliation provisions moot because individuals will always choose to raise claims under Dodd-Frank because of its greater monetary damages, longer statute of limitations, and ease of bringing whistleblower protection claims. However, the SEC’s rule interpretation is not likely to be the end of the debate. A case similar to Asadi is pending in the Second Circuit, Berman v. Neo@Ogilvy LLC, and it may only be a matter of time before the Supreme Court weighs in on the issue.