Securities Snapshot
June 19, 2018

Supreme Court Limits Reach of American Pipe Tolling, Barring Successive Class Actions After Limitations Period

Supreme Court limits reach of American Pipe tolling, barring successive class actions after limitations period; U.S. Securities and Exchange Commission approves notice of proposed rulemaking to amend “Volcker Rule”; SEC Director clears path for secondary sales of security tokens as non-securities, declares Bitcoin and Ether non-securities; Central District of California denies motion to dismiss putative securities class action over alleged misrepresentations and omissions in Snap, Inc.’s S-1 filing; Southern District of New York dismisses Neurotrope securities suit; Southern District of New York grants motion to dismiss in favor of Aratana; and New York Court of Appeals holds that three-year statute of limitations governs Attorney General claims under the Martin Act.

On June 11, 2018, the U.S. Supreme Court decided China Agritech, Inc. v. Resh, holding that the filing of a class action does not toll the statute of limitations for a subsequent class action filed outside the applicable limitations period. Following reports in 2011 that it had engaged in fraud and misleading business practices, China Agritech was sued in three successive putative class actions asserting claims under the Securities Exchange Act of 1934. The claims were subject to the 1934 Act’s two-year statute of limitations and five-year statute of repose. The district court dismissed the third class action as untimely, holding that the first two class actions did not suspend the running of the limitations period for the putative class claims filed after the two-year limitations period. The U.S. Court of Appeals for the Ninth Circuit reversed, holding that the statute of limitations had been tolled as to the putative class claims in the third suit under the Supreme Court’s American Pipe decision. The Supreme Court granted certiorari in late 2017 to resolve a circuit split on this issue. In a decision written by Justice Ginsburg and joined by seven of the other justices, the Supreme Court ruled that American Pipe tolling does not apply to subsequent class actions filed in federal court, which now must be filed prior to expiration of the applicable limitations period regardless of whether substantially the same claims had been asserted in a previously-filed putative class action. The Court explained that “[t]he efficiency and economy of litigation that support tolling of individual claims [under American Pipe] . . . do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.” The Supreme Court’s decision in China Agritech should put an end to securities plaintiffs’ efforts to extend the statute of limitations applicable to their putative class claims by “stacking” successive class actions one after another until certification can be achieved. For more information, please see Goodwin’s client alert on China Agritech here.


On June 5, 2018, the U.S. Securities and Exchange Commission, in a 3-2 vote, approved the release of a notice of proposed rulemaking to amend the “Volcker Rule.” The Volcker Rule refers to provisions of the Dodd-Frank Act that “generally restricts banking entities from engaging in prohibited proprietary trading and from owning or controlling hedge funds of private equity funds.” The SEC is the last of five federal agencies to approve the release of the notice of proposed rulemaking. If adopted as a final regulation, the proposed amendments are expected to significantly change the Volcker Rule. For example, the proposed amendments would categorize banking entities based on trading activity levels. Banking entities with significant trading assets and liabilities would be required to adhere to a compliance program similar to the current regulation’s requirements. Banking entities with moderate trading assets and liabilities would have reduced compliance obligations. Banking entities with limited trading assets and liabilities would be entitled to a presumption that they are in compliance with the Volcker Rule, unless one of the relevant federal agencies determines that the entity has engaged in a prohibited activity and rebuts that presumption. Supporters of the proposal argue that the amendments would clarify what constitutes impermissible trading, while critics argue that the proposal may undo safeguards that could prevent another financial crisis. The financial industry should pay close attention to the finalized rule when it is issued. The proposed amendments will now be published and subject to a 60-day comment period.


On June 14, 2018, William Hinman, Director of the U.S. Securities and Exchange Commission’s Division of Corporation Finance, speaking at the Yahoo Finance All Markets Summit: Crypto, shared remarks regarding the security status of tokens that have been issued in initial coin offerings (ICOs) and other token sales. Specifically, Hinman told the audience that, in some circumstances, digital assets originally sold as securities may later be sold as non-securities. In particular, he also shared his view that Bitcoin and Ether are not securities. Director Hinman’s statements, while not the formal views of the SEC, are instructive, as his comments provide further guidance on features of a digital asset that the SEC may consider to fall outside the ambit of the federal securities laws. For more information, please see Goodwin’s client alert on this topic here and Goodwin’s Digital Currency + Blockchain Perspectives blog.


On June 7, 2018, the U.S. District Court for the Central District of California in In Re Snap Inc. Securities Litigation denied a motion to dismiss a putative securities class action over alleged misrepresentations and omissions made in Snap, Inc.’s S-1 filing made in connection with the company’s initial public offering. The plaintiffs asserted claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, as well as claims under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. The plaintiffs alleged that Snap, the company that provides the popular picture-messaging application Snapchat, concealed material information in its offering documents concerning competitor Instagram’s impact on Snap’s user growth; did not disclose a former employee and whistleblower’s pending lawsuit concerning Snap’s calculation of users; and misrepresented its use of “growth hacking” to inflate user numbers. Citing the recent Ninth Circuit case, Webb v. Solarcity Corp., Judge Stephen V. Wilson considered “each of [p]laintiffs’ allegations individually,” but acknowledged that “the combination of [p]laintiffs’ allegations and a holistic view of the [consolidated amended complaint] . . . guides the Court’s ultimate decision regarding scienter.” Although the court acknowledged that the Instagram allegations alone did not support a strong inference of scienter, the allegations concerning the whistleblower suit and growth hacking did. Applying Webb, the court concluded: “All three claims as a whole create a strong inference of intentional conduct or deliberate recklessness.” The court also determined that the plaintiffs adequately pleaded material misrepresentations or omissions. With respect to the Instagram allegations, the court determined that the context of the S-1’s risk disclosures “allowed [p]laintiffs to sufficiently plead that investors were not adequately advised” of Instagram’s impact and that “hypothetical risk disclosures—e.g., Instagram Stories ‘may be directly competitive . . . do not absolve [d]efendants of their duty to disclose.” (emphasis in original). The court also determined that the plaintiffs’ allegations concerning the whistleblower suit and growth hacking were sufficient to state a claim. For the 1933 Act claims, the court held that plaintiffs had adequately pled material misstatements and omissions with respect to the Instagram and whistleblower allegations. The court further determined that the plaintiffs’ theories of damages were sufficient to survive the motion to dismiss stage. The court’s ruling demonstrates the impact of the Ninth Circuit’s Webb ruling on the sufficiency of pleadings' scienter allegations, and also underscores the importance of adequate disclosures in S-1 filings, especially those concerning user growth for technology companies.


On June 4, 2018, the U.S. District Court for the Southern District of New York in In Re Neurotrope, Inc. Securities Litigation granted a motion to dismiss a securities fraud complaint against Neurotrope, clinical stage biopharmaceutical company that specializes in developing therapeutic drugs for neurodegenerative disease, and certain of its officers, having determined that the plaintiffs had failed to allege a material misrepresentation or omission and scienter. The plaintiffs’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 were based on three categories of alleged misrepresentations made during certain investor conferences and in press releases. First, the plaintiffs alleged that the defendants had misrepresented the statistical significance of its Phase 2b studies of Bryostatin-1, a drug candidate for the treatment of Alzheimer’s Disease. Specifically, the plaintiffs argued that the defendants failed to disclose that Neurotrope used a test that was not the industry standard. Second, the plaintiffs alleged that the defendants failed to disclose until late November 2016 that its Phase 2b study using a certain dosage did not show a statistically significant result. Third, the plaintiffs also alleged that the defendants had misrepresented Bryostatin’s ability to reverse Alzheimer’s Disease. Observing that the plaintiffs in the Second Circuit's 2013 Kleinman v. Elan Corp. decision had made similar arguments that were rejected by the Second Circuit, Judge Lorna G. Schofield dismissed the plaintiffs’ first category of allegations, reasoning: “It is not the Court’s job to determine an appropriate [statistical value] for pharmaceutical studies.” Again relying on Kleinman, the court also rejected the plaintiffs’ second category of allegations with respect to the defendants’ lack of disclosure on the dosage response levels. The court also dismissed the plaintiffs’ allegations with respect to the defendants’ alleged statements regarding Bryostatin’s ability to reverse Alzheimer’s, reasoning that the CEO stated during an investor conference that the Phase 2 trial study’s trial comprised only nine patients, and a reasonable investor would have understood that the defendants’ results were preliminary and required further investigation. The court also held that the defendants’ other alleged misstatements were too vague and nonspecific for any reasonable investor to have relied on them. With respect to intent to defraud, the court determined that the plaintiffs had failed to sufficiently plead scienter, holding that “an inference of scienter does not follow from the mere fact of non-disclosure of relevant information.” Finally, with respect to the individual defendants in particular, the court determined that, although the individuals were likely to be familiar with the clinical trial by virtue of their senior positions and Neurotrope’s small size, such allegations were not enough to impute intent to defraud. The decision demonstrates that plaintiffs may face a high bar in pleading actionable misstatements and the required strong inference of scienter when challenging a clinical trial's statistical methodology.


On June 11, 2018, the U.S. District Court for the Southern District of New York, in In Re Aratana Therapeutics Inc. Securities Litigation, dismissed a putative securities class action suit against Aratana Therapeutics and certain of its officers. The suit asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. The plaintiffs alleged that Aratana as well as Aratana’s president and its chief financial officer made false or misleading statements or omissions concerning the commercialization of ENTYCE, a potential appetite stimulant for dogs that suffer from acute and chronic diseases. Specifically, the plaintiffs alleged that the defendants had repeatedly stated that ENTYCE would reach the market sometime in 2016, but in early 2017 disclosed that ENTYCE would not reach the market until late 2017 due to issues arising from the transfer of its manufacturing process to a facility that required FDA approval. The plaintiffs also argued that they had sufficiently alleged scienter due, in part, to the individual defendants’ suspicious stock sales during the class period. With respect to defendants’ statements concerning the commercial availability of ENTYCE, Judge Paul A. Engelmayer determined that several of the broad statements at issue did “no more than place a ‘positive spin on developments in the [FDA approval] process,’” and thus, were non-actionable corporate puffery. The court also concluded that almost all of defendants’ statements concerning expected FDA approval and the commercialization of ENTYCE “were framed as opinions, forward-looking statements, or both.” Further, the court observed that the defendants had repeatedly warned that the company was dependent on third-party manufacturers and the FDA’s approval of such manufacturers and had informed investors about the transfer. The court also determined that the plaintiffs’ allegations concerning the remaining alleged misstatements at issue were “generalized” and “conclusory.” With respect to the plaintiffs’ allegations concerning suspicious stock sales, the court noted that the parties disagreed on “the significance of the fact that Aratana stock and stock options that the individual defendants acquired . . . were acquired at no cost.” The court determined that although the Second Circuit had not yet addressed the issue, it would adopt Judge Scheindlin’s approach in her 2006 In re eSpeed, Inc. Securities Litigationdecision, and “include among defendants’ total shareholdings both zero-cost shares of common stock and vested options, but not unvested options.” Applying this approach, Judge Engelmayer determined that one of the defendant’s total shares had decreased by approximately 22,600 shares during the class period, while the other defendant’s shares had actually increased during that period, finding that one individual defendant’s “minuscule overall reduction in holdings” along with the other individual defendant’s “significant increase in holdings, undermine an inference that defendants, through their sales, sought to capitalize on the necessarily time-limited artificial inflation.” The court dismissed the case, with prejudice. The Aratana case demonstrates the challenges that securities plaintiffs face when life sciences companies provide optimistic yet cautious disclosures regarded expected commercialization of a product.


On June 12, 2018, in a 4-1 decision, the New York Court of Appeals in People v. Credit Suisse Securities (USA) LLC, et al. held that the New York Attorney General’s Martin Act claims are governed by a three-year statute of limitations, rather than a six-year limitations period. The Attorney General had brought suit under the Martin Act, as well as under Executive Law § 63(12), against Credit Suisse and affiliated entities, alleging fraudulent and deceptive acts related to the creation and sale of residential mortgage-backed securities. The defendants moved to dismiss the complaint, arguing that CPLR 214(2)’s three-year statute of limitations governed and thus, the action was time-barred. The Attorney General argued that CPLR 213(1) or (8), which provides for a six-year limitations period, governed and thus, the action was not time-barred. The New York Supreme Court denied the motion to dismiss, determining that the action was governed by CPLR 213, and the Appellate Division affirmed. The Court of Appeals reversed. The Court of Appeals observed that CPLR 214(2) generally imposed a three-year limitations period for “an action to recover upon a liability, penalty or forfeiture created or imposed by statute” while CPLR 213(8)’s six-year limitation period governed actions “based upon fraud.” CPLR 213(1) governed actions “for which no limitation is specifically prescribed by law.” The Court of Appeals held that because the Martin Act imposed numerous obligations that did not exist at common law, CPLR 214(2)’s three-year limitations period applied to Martin Act claims. With respect to the Executive Law § 63(12) claim, the Court of Appeals held that because the statute provided the Attorney General standing “to redress liabilities recognized elsewhere in the law,” the statute of limitations period depended on “whether the conduct underlying the Executive Law § 63(12) claim amounts to a type of fraud recognized in common law and, if so, the action [would] be governed by a six-year statute of limitations” and remanded issue to the lower court. Judge Feinman issued a concurring opinion and Judge Rivera dissented. Specifically, Judge Rivera reasoned: “Since the Martin Act authorizes enforcement against all acts of fraud involving securities . . . and Executive Law § 63(12) includes this same category of fraud . . . the applicable statute of limitations . . . is six years.” The New York Court of Appeals decision offers important clarity for parties seeking to challenge claims brought under the Martin Act on statute of limitations grounds.