Securities Snapshot
May 21, 2019

Supreme Court Says Whistleblowers Can Extend the Statute of Limitations Under the False Claims Act's Discovery Rule

The Supreme Court gives whistleblowers up to ten years to sue under the False Claims Act; the D.C. Circuit potentially tightens the standard for “willful” violations of the Investment Advisers Act; the Department of Justice issues guidance on cooperation credit in False Claims Act cases; the Second Circuit holds that Express Scripts had no duty to predict the collapse of its relationship with Anthem; the Delaware Court of Chancery largely denies Mobile Posse’s motion for judgment on the pleadings in shareholder suit.

On May 13, 2019, in Cochise Consultancy, Inc. v. U.S. ex rel. Hunt, 587 US __ (2019), the Supreme Court unanimously affirmed a decision by the U.S. Court of Appeals for the Eleventh Circuit that, as a practical matter, extends the time for whistleblowers to file suit under the False Claims Act beyond the default 6-year statute of limitations. In particular, the Court held that the statute’s discovery rule, which extends the statute of limitations to 3 years after the Government official knew or should have known the material facts (with an outer limit of 10 years after the violation), applies to suits pursued by a relator even after the government declines to intervene. As a result, companies with potential FCA liability may more frequently be exposed to suit up to the False Claims Act’s 10-year statute of repose.  For more, read our recent client alert here.


On April 30, 2019, the D.C. Circuit partially vacated an order of the SEC in an opinion that will likely narrow the range of cases in which the SEC can demonstrate a “willful” violation of the Investment Advisers Act. The case named as defendants The Robare Group, an investment adviser, and its principals, Mark Robare and Jack Jones. TRG had a “revenue sharing arrangement” with a financial services company, whereby the financial services company paid TRG when one of TRG’s clients invested in certain funds managed by the financial services company.  From 2005 to 2013, TRG earned about $400,000, or 2.5% of its gross revenue, from these payments.

In September 2014, the SEC Division of Enforcement initiated proceedings against the defendants, alleging that they had failed to disclose to their clients and to the SEC this revenue sharing arrangement and the conflicts of interest it created. The Division of Enforcement claimed that Mark Robare and TRG had willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; that Jones had aided, abetted, and caused those violations; and that all defendants had violated Section 207 of the Investment Advisers Act. Section 206(1), which makes it unlawful for an investment adviser “to employ any device, scheme, or artifice to defraud any client or prospective client,” requires proof of scienter. Section 206(2) forbids any investment adviser from “engag[ing] in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client,” requires only a showing of negligence. Section 207 forbids “any person” from “willfully [] mak[ing] any untrue statement of a material fact in any registration application or report filed with the Commission under section 80b-3 or 80b-4 of this title, or willfully . . . omit[ting] to state in any such application or report any material fact which is required to be stated therein.” After an administrative law judge dismissed the charges, the Division of Enforcement sought review by the SEC. The SEC found that Robare and TRG acted negligently but without scienter, and so violated Section 206(2), but not 206(1), and also found that Jones had caused the violations Section 206(2) and was therefore also liable. The SEC further determined that all three defendants willfully violated Section 207 because Robare and Jones had not disclosed material conflicts of interest in forms submitted to the SEC. The defendants petitioned the D.C. Circuit for review.

The D.C. Circuit denied the petition in part, granted it in part, and remanded to the SEC. It rejected the defendants’ arguments that they had not committed a negligent violation of 206(2), but agreed with the defendants that the SEC was wrong to hold that they had committed a violation of Section 207, which requires a showing of willfulness. The D.C. Circuit noted that it had not yet decided the meaning of “willfully” in Section 207, but assumed without deciding that the standard it articulated in Wonsover v. SEC, 205 F.3d 408, 413–15 (D.C. 2000), applied.Wonsover held that a willful violation requires showing an intentional act constituting the violation, rather than awareness of violating the relevant law. The D.C. Circuit found that the SEC had not adhered to the Wonsover standard, because it had only found that the defendants had submitted forms that contained a material omission, not that they had intentionally omitted material information from the filing. It went on to observe that Section 207 required the SEC to find “that at least one of TRG’s principals subjectively intended to omit material information from” the relevant forms, but the Commission had only found that the defendants had acted negligently, rather than with scienter.

The decision is significant, because the SEC had previously taken the position that under Wonsover one could prove a violation of Section 207 simply by showing submission of a material misstatement, without any further showing of scienter. The SEC likely will now have to show not only that a defendant submitted an inaccurate statement, but also that they intended to omit or misstate a material fact.


On May 7, 2019, the Civil Division of the U.S. Department of Justice released formal guidance on cooperation credit in False Claims Act (“FCA”) cases. The policy, codified in Justice Manual Section 4-4.112, discusses forms of disclosure, cooperation, and remedial action on the part of defendants that may warrant cooperation credit.

Entities or individuals may earn maximum credit where they make a timely self-disclosure, provide full cooperation in the Government’s investigation, and take appropriate remedial steps. The guidelines emphasize the importance of voluntary disclosure, which Assistant Attorney General Jody Hunt described in a statement as “the most valuable form of cooperation.” Self-disclosures that are “proactive, timely, and voluntary” are eligible for credit, as are voluntary disclosures of “additional misconduct” discovered “[d]uring the course of an internal investigation into the [G]overnment’s concerns.” The guidelines provide a non-exhaustive list of other forms of cooperation that may warrant credit, including, among others: identifying involved or responsible individuals; disclosing relevant facts and sources of evidence; making officers and employees with relevant information available to the Government; disclosing findings of an internal investigation; admitting liability or responsibility; and assisting in determining or recovering losses caused by the misconduct. The guidelines further describe remedial measures the Government will evaluate for credit, such as: analysis demonstrating the cause of the misconduct and remediation to address the cause; implementing or improving a compliance program; appropriate discipline or replacement of responsible individuals and supervisors; and “any additional steps demonstrating recognition of the seriousness of the entity’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.”

Usually, credit will be awarded through a reduced penalty or damages multiple sought by the Government, but the maximum credit “may not exceed an amount that would result in the [G]overnment receiving less than full compensation for the losses caused by the defendant’s misconduct (including the [G]overnment’s damages, lost interest, cost of investigation, and relator share).” The Justice Department may also notify relevant agencies about the cooperation, so that the agencies can take the cooperation into account in evaluating administrative remedies, and the Department may also publicly acknowledge the cooperation and assist the cooperating entity or individual to resolve qui tam litigation. The guidelines do not “limit Department attorneys’ discretion to consider all appropriate factors in determining whether and on what basis to resolve an FCA matter.”


On May 7, 2019, the Second Circuit affirmed the Southern District of New York’s dismissal of a putative class action complaint against Express Scripts Holding Company and certain current and former officers of Express Scripts. 

The complaint alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making allegedly false statements concerning Express Scripts’ relationship with Anthem, Inc. between February 24, 2015 and March 21, 2016. Anthem had become Express Scripts’ most important customer after the two companies entered into a 10-year agreement in 2009, under which Express Scripts served as Anthem’s exclusive pharmacy benefits manager. When Anthem engaged in periodic pricing reviews in 2011 and 2014, as provided in the agreement, the companies’ relationship came under increasing strain. The complaint alleged that both parties had accused each other of not acting in good faith, that Anthem had served Express Scripts with two notices of breach, and that Express Scripts had rejected or not responded to Anthem’s proposals and had on certain occasions refused to meet with Anthem. On March 21, 2016, the last day of the class period, Anthem sued Express Scripts for breaching the agreement. The complaint alleged that, over the course of the class period, the defendants made misleadingly positive statements about the companies’ relationship and negotiations, failed to disclose the truth of the relationship and negotiations, and misled investors by amortizing the agreement over 15 years, rather than 10.

In a summary order, the Second Circuit agreed with the district court that the complaint had not adequately pled a violation of the securities laws. It found that the defendants’ characterization of the companies’ relationship and negotiations—e.g., that the relationship was “great” and “very, very solid,” and that Express Scripts was “excited to continue productive discussions”—was a mix of inactionable “puffery” and factually true statements, and it noted that the defendants had acknowledged in statements the possibility that negotiations could fail. The Second Circuit rejected plaintiff’s argument that the defendants had a duty to disclose the rising tensions between the companies because the negotiations were ongoing and the defendants had no obligation to anticipate how they would end.  And the Second Circuit found nothing improper in Express Scripts’ 15-year amortization, which was based on expectation of renewal of the agreement for another 5 years because negotiations were ongoing during the class period, and because Anthem did not inform Express Scripts it would not renew the agreement until later.  Finally, the Second Circuit found that the plaintiff had not adequately alleged scienter, as the defendants’ “statements were consistent with the facts and information available at the time.” 


On May 8, 2019, the Delaware Court of Chancery largely denied a motion by Mobile Posse Inc. and its board for judgment on the pleadings in a suit filed by common shareholder Anurag Mehta. Mehta, a former employee of Mobile Posse, alleged in his complaint that he learned of management’s proposed buyout of the company around March 28, 2018, when the company distributed a consent solicitation relating to “parachute payments” in connection with the merger.  The March 28 solicitation mentioned the merger, but did not describe it. The merger was approved by the company’s preferred stockholders on April 2, 2018. The merger consideration was less than the preferred stockholders’ total liquidation preference, and so common stockholders received no payment for the merger.  Plaintiff claimed that he attempted to obtain more information about the merger after receiving the March 28 solicitation, but that Mobile Posse did not respond until April 19, 2018, when it emailed him a notice and stockholder merger resolution. 

The complaint asserts six causes of action: (1) a violation of 8 Del. C. § 262 for failing to provide required information related to appraisal rights within the statutory timeframe; (2) a violation of 8 Del. C. § 228 for using a pre-printed effective date in the March 28 solicitation, and for failing to disclose material information necessary for the stockholders’ consent; (3) a violation of 8 Del. C. § 228 for failing to provide prompt notice of the action by written consent; (4) a violation of 8 Del. C. § 251 for failing to state in the merger agreement the consideration paid to stockholders; (5) breach of the fiduciary duty of disclosure for failure to meet statutory notice requirements; (6) breach of the fiduciary duty of loyalty for engaging in a self-dealing transaction. The company issued a supplemental notice on June 19, 2018, which purported to cure various disclosure deficiencies alleged in the complaint.

Viewing the complaint and facts in the light most favorable to the plaintiff, the Court of Chancery denied judgment on the pleadings as to Count 1 because the complaint adequately alleged that defendants failed to notify some shareholders of their appraisal rights within the timeframe required by Section 262, and the June 19 supplemental notice did not cure the defect through a “replicated remedy.” The Court of Chancery explained that even if a “replicated remedy” were possible, the supplemental notice provided incorrect information. Although the defendants were correct that they could use a pre-printed effective date on the March 28 solicitation form and were entitled to judgment on that issue, the Court of Chancery also denied judgment on the pleadings as to Count 2’s claim under Section 228 because the plaintiff adequately alleged that the solicitation failed to provide material information. As to Count 3, the Court of Chancery found that the safe harbor of 8 Del. C. § 144 was not available because the complaint adequately alleged that the April 19 notice failed to provide material facts the safe harbor requires, and also found that the complaint adequately alleged that the company violated Section 228’s prompt notice requirement by failing to provide written notice of the merger to minority stockholders within the timeframe of Section 262. The Court of Chancery found that Count 4 adequately alleged that the merger agreement failed to meet the requirements of Section 251 because it failed to describe the consideration into which the company’s preferred stock would be converted.  Specifically, the agreement referenced a payment schedule, but the copy of the agreement provided to common stockholders failed to attach the schedule.  Because the plaintiff adequately pled a violation of Section 262, the court found Count 5’s allegation of breach of the fiduciary duty of disclosure adequately pled. And because the complaint alleged that a deal explored before the merger would have contained greater consideration, such that common stockholders could have received a payment, the Court of Chancery found that Count 6 adequately alleged that the deal was not entirely fair.