SEC regulatory relief
We expect that the Trump administration and the Republican-led U.S. Congress will advance significant policy shifts and rule changes at the SEC that are designed to encourage companies toward public ownership and to facilitate capital formation in both public and private markets.
On October 23, 2017, the Securities and Exchange Commission (“SEC”) unanimously approved (the “Approval Release”) the Public Company Accounting Oversight Board’s (“PCAOB”) proposal to adopt a new auditing standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When Auditor Expresses an Unqualified Opinion, and related amendments to other auditing standards. As discussed in the Approval Release, the PCAOB adopted the new standard in final form on June 1, 2017, subject to SEC approval, following a PCAOB concept release, proposal and reproposal process beginning in 2011.
Daily Journal has published the article “Ruling extends heightened securities fraud pleading standard,” written by Neal Marder, a partner in the litigation practice at Akin Gump, and associates Andrew Jick and Kelly Handschumacher. The article discusses a ruling by the U.S. Court of Appeals for the 9th Circuit in City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology Inc., a case that affirmed the dismissal of a pension fund’s securities fraud claims.
SEC scrutiny: Monitor the SEC’s increased scrutiny and more frequent enforcement actions, including whistleblower developments, guidance on non-GAAP measures and tougher positions on insider trading
1. You Can Prove a Negative
On November 19, 2014, Sabrina Erdely’s Rolling Stone article “A Rape on Campus: A Brutal Assault and Struggle for Justice at UVA” went viral. The article depicted the violent gang rape of a University of Virginia student (“Jackie”) at a Phi Kappa Psi fraternity party. The online article was viewed 2.7 million times. Rolling Stone issued a contemporaneous press release, while Erdely promoted the article in media appearances. In April 2015, Rolling Stone issued a formal retraction after the premise of the article fell apart. UVA administrator Nicole Eramo, Phi Kappa Psi and an individual fraternity member sued Rolling Stone for defamation. Last month, a jury awarded Ms. Eramo $3 million in damages.
In IBEW Local 98 Pension Fund v. Best Buy Co. Inc., Plaintiffs alleged that misleading statements by Best Buy officers made during a phone call with stock analysts artificially supported Best Buy’s stock prices until a report issued three months later revealed a decline in sales. Defendants successfully defeated class certification by demonstrating that any increase in price of the Best Buy stock was attributable to nonfraudulent events.
On July 25, 2015, Judge Barbara Lynn of the Northern District of Texas issued a formative opinion in the class actions securities arena. The case,The Erica P. John Fund, Inc., et al. v. Halliburton Co., et al., No. 3:02-CV-1152-M, is viewed as a bellwether among securities class actions due to its treatment of novel issues regarding, among other things, a defendant’s ability to disprove reliance—i.e., a causal link between alleged misrepresentations and an eventual drop in stock prices upon correction—for purposes of class certification.
Rather than requiring plaintiffs to prove reliance for each individual shareholder, securities class action cases have long permitted a more efficient approach to establish the necessary causal link. This approach, set forth in Basic v. Levinson, 485 U.S. 224 (1988), invokes a rebuttable presumption in favor of reliance if certain elements are met. Recently, in connection with the Halliburton case, the Supreme Court held this presumption can be rebutted if a defendant shows an alleged misrepresentation did not affect the market price of a security. If the presumption is rebutted, the class cannot be certified.
This week, we wanted to highlight this article on The Top Ten D&O Stories of 2014, discussing the most significant changes in the directors & officers liability environment and their possible implications for 2015.