Securities Snapshot
August 13, 2019

Second and Third Circuits Reject Defendants’ Attempts to Vacate Convictions Based on the Supreme Court's “Official Act” Holding in McDonnell

Second And Third Circuits Reject Defendants’ Attempts To Vacate Convictions Based On The Supreme Court’s “Official Act” Holding In McDonnell; Delaware Court of Chancery Dismisses Caremark Claims Against Retailer’s Directors For Allegedly Disregarding Non-Compliance With State Pricing Laws; Second Circuit Holds That Investment Company Act Creates An Implied Private Right of Action; New York Court Holds That PSLRA’s Automatic Discovery Stay Applies In Securities Class Actions Filed In State Court Under 1933 Act; District Of New Jersey Denies Dismissal Of Securities Class Action Arising Out Of Alleged Generic Pharmaceutical Price-Fixing Scheme.

In 2016, the Supreme Court vacated the federal bribery convictions of former Virginia Governor Robert McDonnell for allegedly accepting bribes from a company in exchange for the state’s assistance in promoting a dietary supplement, including arranging meetings, hosting events, and promoting the company’s product with government officials. The Supreme Court took a narrow view of the statutory requirement of a bribe exchanged for an “official act,” concluding that the term requires that (i) there be a “question, matter, cause, suit, proceeding, or controversy” that may be brought before a public official, and (ii) the public official agree to make a decision or take an action on that matter. Under that standard, the Court held that merely setting up a meeting, calling another public official, or hosting an event does not, standing alone, qualify as an official act sufficient to sustain a charge under the federal bribery statute. The McDonnelldecision has had a significant impact in public corruption cases, providing support for other defendants to obtain dismissal or new trials, but two recent decisions highlight some of the limitations of the decision's impact.

On August 5, 2019, the United States Court of Appeals for the Third Circuit issued a decision in Cordaro v. United States, rejecting a former government official’s attempt to invoke McDonnell to vacate his bribery-related convictions. In 2011, Robert Cordaro, a Pennsylvania county commissioner, was convicted of bribery, extortion, and racketeering crimes for accepting bribes from engineering and architecture businesses who were seeking Cordaro’s assistance in obtaining contracts with the county. In the wake of McDonnell, Cordaro sought collateral relief, arguing that a jury properly instructed under McDonnell would have concluded that he did not accept bribes in exchange for “official acts” because the resulting contracts were not with the county itself, but with independent governmental agencies that were technically distinct from the county. The Third Circuit affirmed the district court’s denial of Cordaro’s petition, holding that the contracts Cordaro secured are “matters” under McDonnell, and that convincing evidence at trial established that Cordaro agreed to (or in fact, did) influence the contracting process through “official action” in exchange for the bribes. The decision provides support for the government’s ability to pursue bribery charges against public officials for accepting bribes in exchange for agreeing to pursue official actions not only on matters pending before formal branches of the government (e.g., the legislative and executive branches), but also other governmental entities, such as state universities and local government agencies.

On the same day, in United States v. Thiam, the United States Court of Appeals for the Second Circuit declined to vacate the money laundering convictions of a former Guinean mining minister who accepted bribes in exchange for valuable mineral rights. Mahmoud Thiam, a U.S. citizen and the former minister of mines and geology in the Republic of Guinea, was convicted of money laundering and conducting transactions in criminally derived property, arising out of a bribe that he accepted from a Chinese company in exchange for awarding the company rights to a mining joint venture. Both statutes forbid transactions involving proceeds of “specified unlawful activity,” which includes “an offense against a foreign nation involving bribery of a public official.” Thiam appealed, arguing that the district court erred in refusing to instruct the jury that the underlying Guinean bribery predicate for Thiam’s money laundering offenses required an “official act” under McDonnell. The Second Circuit rejected Thiam’s argument, holding that it would require limiting “conduct that Guinea has chosen to criminalize,” and that “principles of international comity” weighed against applying McDonnell’s “official act” definition to Guinea’s penal code. The decision is an example of courts' reluctance to extend McDonnell to corruption cases charged under other statutes—a reluctance that the Second Circuit has also recently shown in connection with prosecutions under the Foreign Corrupt Practices Act.


On July 29, 2019, the Delaware Court of Chancery issued an opinion in Rojas v. Ellison, granting a motion to dismiss a stockholder derivative action against board members of retailer J.C. Penney. The lawsuit stemmed from a 2012 class action filed in California state court, in which the plaintiffs alleged that J.C. Penney engaged in a “false reference pricing” scheme that involved selling goods at falsely inflated discounts from sticker prices that the retailer never actually charged. The California action resulted in a $50 million settlement and the company’s implementation of several pricing reforms, including creation of a new pricing policy, promotional pricing committee, and director of pricing compliance. Just a few months after the settlement in the California action, the Los Angeles City Attorney filed an action against several retailers, including J.C. Penney, involving similar allegations of ongoing pricing violations. Without making a demand on the company’s board, the plaintiff in the Delaware derivative action alleged a Caremark claim—that the J.C. Penney directors breached their fiduciary duties by ignoring red flags of continuing false reference pricing violations even after the settlement in the California action. The plaintiff alleged that his failure to make a demand was excused as futile because a majority of the board was exposed to a substantial likelihood of personal liability.

Applying Caremark’s demanding standard Chancellor Bouchard concluded that the plaintiff failed to allege facts from which it could be reasonably inferred that the directors consciously allowed J.C. Penney to violate pricing laws. The plaintiff could not satisfy the first prong of the Caremark standard (i.e., whether the board “utterly” failed to implement any reporting or information system or controls), in view of the governance reforms that the company instituted after several rounds of discussions between management and the board in the wake of the California settlement. As to the second prong (i.e., whether the board consciously failed to monitor the company’s operations), the court rejected the plaintiff’s reliance on the settlement in the California action itself as the type of “red flag” necessary to satisfy Caremark because the settlement did not put the directors on notice of any ongoing violations of law. Plaintiff therefore did not meet his burden of alleging that the directors faced a substantial likelihood of personal liability, demand on the board was not excused, and the case was dismissed with prejudice. The court’s decision reinforces that a Caremarkclaim is “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” and that a company’s settlements arising out of prior government enforcement proceedings or civil litigation will generally not support such a claim absent “strong factual allegations of board knowledge of ongoing legal violations in the wake of” such settlements.


On August 5, 2019, the United States Court of Appeals for the Second Circuit issued an opinion in Oxford University Bank v. Lansuppe Feeder, Inc., holding that the Investment Company Act of 1940 (“ICA”) creates an implied private right of action to seek rescission by a party to a contract that violates the ICA. The underlying dispute involved the liquidation of a special purpose investment vehicle, Soloso CDO 2005-1 Ltd. In 2013, Soloso failed to pay its periodic interest to senior noteholders, and majority senior noteholder Lansuppe Feeder LLC demanded that the trustee liquidate Soloso. But junior noteholders, who would have received no compensation in the event of liquidation, raised objections to Lansuppe’s demand. Lansuppe filed a trust instruction proceeding in the Southern District of New York against the nominal defendant trustee, seeking a declaratory judgment and order directing the trustee to liquidate Soloso’s proceeds according to the trust’s indenture. In response, the group of junior noteholders intervened and filed cross-claims under Section 47 of the ICA. The junior noteholders argued that Soloso violated the ICA by issuing notes that were eventually re-sold to an entity that was not a “Qualified Purchaser” within the meaning of the ICA, as required by the trust’s indenture. According to the junior noteholders, the re-sale of notes to a non-Qualified Purchaser triggered an event of default that warranted rescission or at least pro rata distribution of the trust’s assets. The district court granted Lansuppe’s motion for summary judgment and ordered liquidation because the particular section of the ICA at issue did not create a private right of action.

The Second Circuit affirmed, agreeing with the district court that the trust’s indenture did not actually violate the ICA. But in reaching its decision, the court disagreed with the district court and also parted with the Third Circuit, in holding that the ICA does create an implied private right of action for a contractual party to seek rescission of a contract under Section 47 of the ICA, thus establishing in the Second Circuit an implied private right of action for a party to seek rescission of a contract that violates the ICA. For more information, read our recent client alert here.


On August 6, 2019, the New York Supreme Court (New York County), in In re EverQuote, Inc. Securities Litigation, held that the automatic stay of discovery provided for in the federal Private Securities Litigation Reform Act (PSLRA) applies in 1933 Act cases filed in New York state court. This opinion follows the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, holding that state courts have concurrent jurisdiction over 1933 Act cases and that these cases may not be removed to federal court. In the wake of EverQuote’s IPO, a shareholder filed a putative class action against the company and certain of its officers and directors, alleging that the offering materials contained misstatements and omissions in violation of the 1933 Act. The defendants moved to dismiss the complaint and concurrently moved to stay discovery, arguing that the PSLRA’s stay of discovery applies in New York state court.

Weighing in on an issue that has split state courts across the country—and parting ways with at least two other New York state trial courts that have recently declined to impose the PSLRA’s discovery stay—Justice Borrok rejected the argument that application of the PSLRA’s automatic stay of discovery would undermine Cyan’s holding that 1933 Act cases may be heard in state court. Instead, the trial court applied the plain language of the PSLRA, which provides that discovery is stayed during a pending motion to dismiss “[i]n any private action arising under this subchapter”—in the court’s words, “Period. Full Stop.” The court explained that declining to apply the PSLRA’s discovery stay in state court “would also run afoul of the well-recognized purpose” of the statute because Congress sought to “curtail” the “abuse” of “filing lawsuits and making significant discovery requests in otherwise meritless lawsuits . . . in the hope of encouraging early settlement.” The court also observed that a divergence in application of the discovery stay in state and federal court would create the “undesirable” and “absurd” effect of plaintiffs filing 1933 Act cases in state court “to avoid the very protection supporting the enactment” of the PSLRA’s discovery stay. As plaintiffs continue to file 1933 Act cases in state court with increasing regularity, the application of the PSLRA discovery stay may require appellate intervention in view of the split of authority on the issue in New York state court.


On August 6, 2019, the United States District Court for the District of New Jersey issued a decision in In re Allergan Generic Drug Pricing Securities Litigation declining to dismiss securities fraud claims under the 1934 Act against pharmaceutical company Allergan, its directors, and six of its executives. Specifically, the plaintiffs’ second amended complaint alleged that Allergan participated in a generic drug price-fixing conspiracy with other companies, and then issued false and materially misleading statements about Allergan’s pricing behavior, as well as a Department of Justice investigation regarding that behavior, during the three-year class period ending in November 2016.

In denying the defendants’ motion to dismiss, the court concluded as a threshold matter that the plaintiffs adequately alleged the existence of an underlying price-fixing conspiracy, which formed the basis of plaintiffs’ claims regarding the allegedly misleading statements and omissions. In particular, the court credited the plaintiffs’ reliance on allegations from a civil lawsuit filed by twenty state Attorneys General against several companies, including Allergan, which specifically described anti-competitive communications between Allergan executives and executives of other pharmaceutical companies, including one such company whose CEO subsequently pleaded guilty to criminal antitrust violations, along with what the court described as “extensive allegations of circumstantial evidence of collusion.” In concluding that the plaintiffs alleged sufficient facts to support a strong inference of the defendants’ fraudulent intent in issuing the alleged misrepresentations, the court similarly cited the state AG action as well as an ongoing DOJ criminal investigation, in addition to the “core operations” allegations that Allergan’s generic drugs accounted for more than one-third of the company’s class period revenues. The decision underscores the difficulty of obtaining dismissal of securities class actions that rely on detailed non-public information uncovered in the wake of governmental investigations.