Securities Snapshot
September 10, 2019

New York State Extends Statute of Limitations for Bringing Martin Act Suits to Six Years

New York State Extends Statute of Limitations for Bringing Martin Act Suits to Six Years; Southern District of California Dismisses Securities Class Action Against Developer of Hepatitis C Treatment; Southern District of Florida Dismisses Securities Class Action Against LaCroix Beverage Maker; Massachusetts District Court Grants Third New Trial to Ticket Swap Bribery Defendant Due to Sixth Amendment Violation.

On August 26, 2019, New York Governor Andrew Cuomo signed into law a bill that extends from three to six years the timeframe within which the New York Office of the Attorney General can bring financial fraud claims under the Martin Act, the state’s blue sky law, as well as Executive Law § 63(12), another anti-fraud statute. The bill was presented as a direct response to the New York Court of Appeals’ ruling last year in ;People v. Credit Suisse Securities USA LLC et al., which held that a three-year statute of limitations applied in civil fraud enforcement actions. In that case, the Court of Appeals rejected a government argument that a six-year statute of limitations should apply to claims under the Martin Act and Executive Law 63(12) because they are “based in fraud,” holding instead that the three-year time frame applied because the Martin Act extended liability for “fraudulent practices” beyond the scope of common law liability.

The New York Attorney General’s Office had strongly advocated for the bill, and New York Attorney General Letitia James and Governor Cuomo have both lauded the bill as strengthening two of the state’s most important tools in prosecuting financial fraud. The Martin Act in particular has been used in a variety of securities contexts over the years, including cases involving major banks, cryptocurrency exchanges, and cases brought against individuals. The new bill may lead to an increase in financial fraud actions brought by the New York Attorney General’s office at a time when federal investigations and lawsuits involving financial fraud claims have reportedly slowed down.


On September 5, 2019, in In re Regulus Therapeutics Inc. Securities Litigation, the Southern District of California dismissed with leave to amend a putative class action brought under the Securities Exchange Act of 1934 against biopharmaceutical company Regulus Therapeutics and three of its executives. Plaintiffs alleged that Regulus, which was developing a drug to treat hepatitis C, misled investors about the drug’s safety by downplaying the potential connection between the drug and serious adverse events of liver toxicity and jaundice in two patients, even though Regulus had disclosed an investigator’s report indicating that the drug may be related to the serious adverse events. Regulus disclosed in 2016 that the FDA issued a clinical hold as a result of these safety issues, followed by announcements in early 2017 of four additional serious adverse events and later the resignation of the company’s CEO. In June 2017, Regulus announced it would discontinue development of the drug.

The court held that plaintiffs failed to plead both falsity and scienter. Plaintiffs attempted to plead each of these elements of securities fraud based on internal preclinical and nonclinical results that allegedly should have alerted defendants to a far stronger link between the drug and liver toxicity than what they publicly disclosed. But the court held that in view of plaintiffs’ “vague and impressionistic” claims, it was “unable to determine whether the complained-of statements differed materially from the actual state of affairs that existed at the time they were made and whether a reasonable investor would have considered the disclosure of such results to significantly alter the total mix of information made available.” The court likewise held as to scienter that the internal reports were “too vague and impressionistic to provide any indication of conscious misconduct or deliberate recklessness.” Plaintiffs’ other scienter allegations—routine business objectives and the CEO’s resignation—also did not give rise to a strong inference of scienter, because the complaint did not include specific facts to tie these allegations to the alleged misstatements. This ruling underscores that a plaintiff attempting to plead securities fraud based on adverse safety events in a clinical trial must point to specific facts that defendants allegedly knew that contradicted their public statements, especially where defendants promptly disclosed the adverse events in the first place.


On August 29, 2019, in Luczak v. National Beverage Corp. et al., the Southern District of Florida dismissed a putative securities class action under the Securities Exchange Act of 1934 against National Beverage, the beverage company behind LaCroix sparkling water, and two of its top executives. Plaintiff brought the lawsuit on behalf of persons who purchased stock in National Beverage between July 2014 and July 2018, based on four categories of alleged misstatements or omissions: (1) LaCroix was not “all natural,” as National Beverage publicly claimed; (2) National Beverage failed to disclose the total share of sales or profits attributable to LaCroix in violation of Generally Accepted Accounting Principles (GAAP); (3) National Beverage misrepresented the significance of certain performance metrics; and (4) National Beverage violated its publicly disclosed Code of Ethics by not taking disciplinary action against one executive who was accused of sexual harassment.

The court held that plaintiff did not sufficiently allege securities fraud as to any of the four categories. With respect to the first category (the “all natural” claim), the court found that plaintiff failed to allege a material misstatement or omission where plaintiff merely cribbed unproven allegations from a separate consumer class action. With respect to the second category (GAAP violation), the court found that plaintiff failed to sufficiently plead scienter—i.e., that defendants acted with fraudulent intent or severe recklessness in failing to disclose the precise amount of LaCroix revenues within National Beverage’s product portfolio. With respect to the third category (touting certain performance metrics) and fourth category (sexual harassment), the court concluded that plaintiff had failed to plead loss causation where the underlying information was already public and the alleged “corrective disclosure” news stories merely repackaged that public information. This dismissal, based on plaintiff’s failure to plead three different elements of a claim for securities fraud, is a good example of the demanding pleading burden in a securities class action.


On August 30, 2019, in U.S. v. Ackerly et al., Judge Richard Stearns of the District of Massachusetts granted a third new trial to defendant Donna M. Ackerly, a former account executive at proxy solicitation firm Georgeson LLC, following her conviction for participating in a scheme to bribe a proxy advisory firm employee, Brian Zentmyer, with expensive sports and concert tickets in exchange for confidential shareholder voting data. The court’s decision was based on a finding that Ackerly’s Sixth Amendment right of confrontation had been violated by the government asking on redirect examination whether one of its witnesses had knowledge that Zentmyer had pled guilty to involvement in the charged conspiracy. The court further found that, despite the fact that Ackerly’s lawyer had asked about Zentmyer’s cooperation agreement during cross examination of the witness and thus arguably “invited” the government’s question, and despite the fact that the court had given a limiting instruction, the government’s reference to Zentmyer’s guilty plea was not harmless error.

Judge Stearns likened Zentmyer’s guilty plea to a testimonial confession, finding that Ackerly’s Sixth Amendment right was violated because the plea—specifically linked to the conspiracy for which Ackerly was on trial—was offered for the truth of the existence of the conspiracy itself. The court further found that the government’s statement was not harmless error, in light of the importance of Zentmyer’s guilt to the government’s case and the otherwise thin evidence implicating Ackerly in the conspiracy. The court noted, however, that had the government only mentioned the guilty plea without adding the additional detail, there may have been traction to a harmless error argument. Additionally, the court indicated that a stronger, more detailed limiting instruction might also have sufficiently offset even the “powerfully incriminating” impact of the plea. The decision, while favorable for Ackerly, demonstrates the difficulty in establishing that a new trial is warranted even in the face of a constitutional violation.