Securities Snapshot
July 2, 2019

First Circuit Court Of Appeals Affirms Dismissal Of Securities Class Action Against Biogen On Scienter Grounds

First Circuit Court of Appeals affirms dismissal of securities class action against drug company on scienter grounds; Eastern District of New York dismisses class action against mutual fund; Southern District of New York vacates insider trading tippee’s guilty plea; Delaware Supreme Court revives class action against ice cream manufacturer’s directors and officers; Delaware Court of Chancery permits putative class action to proceed against financial services firm and others.

On June 27, 2019, the First Circuit Court of Appeals, in Metzler Asset Management GmbH v. Kingsley et al., affirmed the dismissal of a putative securities class action against Biogen and certain of its executives. This was the second case arising out of Biogen’s statements about its multiple sclerosis drug Tecfidera, with the first case resulting in dismissal and affirmance by the First Circuit in 2017. In this second case, which included a different class period and additional alleged misleading statements about the drug’s safety profile, the First Circuit also affirmed the district court’s dismissal because plaintiffs failed to adequately allege fraudulent intent, or scienter.

The First Circuit assessed various alleged misstatements about Tecfidera’s safety profile and usage rate and whether there was any intent to deceive surrounding those alleged misstatements. The court held that plaintiffs had not alleged such intent because: (i) even if a statement “read in a vacuum” is misleading, that alone does not give rise to a strong inference that it was said with an intent to deceive; (ii) Biogen’s disclosures that it expected safety issues would slow the growth of the drug undercut any inference of scienter; (iii) allegations from 17 confidential witnesses “were imprecise, did not contain information that was directly communicated to the individual defendants, or concerned events that occurred after the individual defendants made the plausibly misleading statements at issue”; and (iv) a company’s general focus on its product and awareness of issues with that product (under theories of “core operations” or that the company operates in a highly regulated industry) does not give rise to a strong inference of scienter absent additional specific facts.

This case reinforces the well-established law in the First Circuit and elsewhere under which a complaint must include specific facts to survive the Private Securities Litigation Reform Act’s heightened standard for pleading fraudulent intent.


On June 25, 2019, the Eastern District of New York, in Emerson v. Mutual Fund Series Trust et al., dismissed a putative class action with prejudice brought against a mutual fund, its distributor, advisor, and certain of its senior management, based on allegations that defendants falsely advertised the fund as a stable investment. The court held, among other things, that defendants had adequately warned investors of the potential risks.

The court split the alleged misrepresentations in the fund’s registration statement and related filings into four categories, and held that none were actionable, because the fund: (i) did not mispresent itself as a low-risk investment aimed at capital preservation with a low correlation to trends in the equity markets, because those statements were goal-oriented and were not a promise of a particular investment strategy; (ii) adequately disclosed that it could and did write uncovered call options in its offering documents and various lists of holdings published every quarter; (iii) did not make misleading statements about its risk protocols where the particular statements alleged by plaintiffs were mere “puffery”; and (iv) did not misrepresent its past performance because the disclosures “adequately disclosed the fund’s exposure to market movements.” The court also held that the complaint failed to adequately allege the fund’s advisor, Catalyst Capital, “controlled” the Fund under Section 15 of the Securities Act, because allegations that the advisor managed the fund’s strategy, without more, fail to state a claim for control person liability.

This case reinforces the importance of robust disclosures by mutual funds and the resulting pleading challenges that plaintiffs face against funds and their advisors and service providers. Goodwin represented the distributor in this matter.


On June 21, 2019, in United States vs. Lee, Southern District of New York District Judge Paul G. Gardephe vacated defendant Richard Lee’s 2013 guilty plea to conspiracy and substantive securities fraud, on the basis that recent decisions clarifying the personal benefit requirement for tippee liability meant that there were insufficient facts to support Lee’s plea that he was tipped and traded on inside information.

In his decision, Judge Gardephe chronicled recent case law addressing the personal benefit requirement in insider trading cases, including the Second Circuit’s 2014 decision in United States v. Newman and the Supreme Court’s 2016 decision in United States v. Salman, and concluded that, despite being “partially abrogated” by SalmanNewman is nonetheless significant, because it clarified the personal benefit requirement for tippee liability. Specifically, Judge Gardephe explained that, under Newman's articulation of personal benefit, tippee liability exists only where the government can prove that the defendant knew that information disclosed in breach of a fiduciary duty was both confidential and that it was disclosed in exchange for a personal benefit. The court held that Lee’s plea allocution—which addressed only his awareness of breach of a fiduciary duty in general terms—did not sufficiently establish Lee’s knowledge that the alleged tippers received a personal benefit.

The court’s holding reinforces Newman’s importance in tipper-tippee cases and may open the door to similar challenges to prior pleas. However, it leaves open the question as to what level of detail is required to establish a tippee’s knowledge that a tipper received a personal benefit—a concept that may prove particularly complicated where the benefit is non-financial and the tippee is downstream.


On June 18, 2019, the Delaware Supreme Court, in Marchand v. Barnhill, overturned the Delaware Court of Chancery’s dismissal of claims against executives and directors of an ice cream manufacturer, Blue Bell Creameries USA, Inc., based on alleged breaches of fiduciary duties for failure to oversee and monitor operations in connection with an early-2015 listeria outbreak at Blue Bell’s manufacturing plants that resulted in three deaths, a product recall, an operational shutdown, and a liquidity crisis.

The Delaware Supreme Court had two grounds for reversal: plaintiffs’ allegations were sufficient to (i) create reasonable doubt as to whether directors holding a majority of the Blue Bell board’s votes impartially or objectively could assess whether to bring a lawsuit against certain Blue Bell executives, and (ii) plead a Caremark claim against Blue Bell’s directors for their alleged failure to implement any system to monitor Blue Bell’s food-safety compliance. With respect to the first ground, director independence, the Delaware Supreme Court found that allegations against one director who the Court of Chancery had concluded was independent from Blue Bell’s CEO—a director whose success the Supreme Court inferred “was in large measure due to the opportunities and mentoring given to him” by the CEO’s family—created reasonable doubt about whether the director impartially could decide to vote to sue the CEO. With respect to the second ground, the Caremark standard, the Supreme Court observed that despite the difficulty of pleading and proving a Caremark claim, “Caremark does have a bottom-line requirement that is important: the board must make a good faith effort—i.e., try—to put in place a reasonable board-level system of monitoring and reporting.” The Supreme Court held that the facts as alleged sufficiently suggested that this bottom-line requirement was not met.

As to director independence, the Supreme Court’s ruling reinforces that derivative plaintiffs must allege specific facts that reveal a deep, meaningful, and longstanding relationship between the director and the individual he or she is being asked to sue—not just that they are social acquaintances who run in similar circles. And as to a Caremark claim, which remains difficult to plead and prove, this decision is a good reminder for boards of directors (especially those operating in regulated industries) to assess the procedures in place for information flow to the board on key areas of operational risk.


On June 21, 2019, the Delaware Court of Chancery, in Chester County Employees’ Retirement Fund v. KCG Holdings, Inc. et al., denied a motion to dismiss a putative class action with allegations that KCG’s directors breached their fiduciary duties in negotiating and approving Virtu Financial, Inc.’s acquisition of KCG by failing to maximize value for the KCG stockholders.

The court concluded that the complaint sufficiently pled three allegedly significant deficiencies in KCG’s proxy disclosures that removed the deferential business judgment protections arising under Corwin v. KKR Financial Holdings: (1) so-called secret dealings between Virtu and Jefferies, KCG’s largest stockholder and long-time advisor, which allegedly undercut the KCG board’s ability to get the greatest value from Virtu and pressured the board to proceed with the acquisition despite believing a restructuring plan was financially superior; (2) the KCG CEO’s alleged rejection of the deal unless he could negotiate his compensation package before final approval, which plaintiffs allege to have ultimately resulted in the KCG board passing on a slightly higher topping bid; and (3) the CEO and management team’s allegedly pessimistic revision of projections after the board had approved the deal. Based on these alleged deficiencies, the court held that the KCG stockholder vote was not fully informed, and it therefore applied enhanced Revlon scrutiny to the review of the transaction. Under Revlon, the court held that the complaint sufficiently alleged an inference of bad faith, because it was reasonably conceivable that the directors acted with a purpose other than that of advancing the best interests of the corporation.

This decision illustrates certain pitfalls in M&A transactions that could expose a board to litigation risk, especially at the initial pleading stage. It serves as a reminder that in a sale, particularly under Revlon, the board must focus on stockholder value above other considerations.