Securities Snapshot
May 5, 2020

S.D.N.Y. Dismisses Securities Class Action Against Biopharmaceutical Company Arising From Undisclosed Form 483 Regarding Manufacturing Conditions

S.D.N.Y. Dismisses Securities Class Action Against Biopharmaceutical Company Arising from Undisclosed Form 483 Regarding Manufacturing Conditions; Court of Chancery Refuses to Dismiss Derivative Suit Based On Allegations of Excessive Executive Stock Awards Arising from Quid Pro Quo; California Federal Court Rejects Attempt to Circumvent One-Year Statute of Limitations, Dismissing Putative Securities Class Action Following IPO; SEC Issues Proposed Rule to Modernize Process for Fund Valuation Practices and Clarify Obligations of Boards in Delegating Valuation to Advisors; In Matter of First Impression, California Federal Court Holds that Securities Fraud Claims Arising Out of Direct Listing Sufficiently Plead Statutory Standing and Damages

On April 7, 2020, in Arkansas Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., a divided Second Circuit panel affirmed a lower court’s denial of Goldman Sachs’ effort to decertify an investor class. In a 2 to 1 opinion, the panel also rejected Goldman’s attempt to narrow the “inflation-maintenance theory,” a theory grounded in the idea that a corporation’s misstatements can fraudulently maintain a stock’s value at an artificially inflated price. The dissenting opinion would have reversed the lower court, concluding that Goldman had introduced compelling evidence that rebutted the presumption of class-wide reliance on the alleged omissions and misstatements on which the plaintiffs’ complaint was based by showing that those alleged omissions and misstatements had not impacted the price of Goldman common stock.

Plaintiffs’ lawsuit stems from Goldman’s role as an underwriter in a 2007 Abacus collateralized debt obligation (“CDO”) transaction. Specifically, plaintiffs allege that Goldman made misrepresentations about being “conflict-free” to maintain an artificially inflated stock price. Goldman’s stock price declined after the Securities and Exchange Commission (“SEC”) filed a suit against Goldman in 2010 that ostensibly revealed Goldman’s conflicts in the 2007 transaction. Goldman had previously defeated class certification in January 2018 when the Second Circuit reversed and remanded the lower court’s order certifying a class. In its remand order, the Second Circuit ordered the lower court to consider additional evidence, including over 30 media reports, that Goldman argued countered plaintiffs’ inflation-maintenance theory because such reports included public comments related to Goldman’s conflicts of interest. On remand, despite this additional evidence, the lower court recertified the class. In its second appeal, Goldman argued that the lower court abused its discretion in two ways: (1) it misapplied the inflation-maintenance theory; and (2) it erroneously rejected Goldman’s rebuttal evidence in holding that Goldman failed to rebut a legal presumption, known as the Basic presumption, that shareholders are presumed to have relied on a defendant’s alleged misstatements in purchasing its stock at the market price.

Goldman argued that the inflation-maintenance theory only applies when the stock price’s initial inflation was “fraud-induced.” Additionally, Goldman asserted that the lower court erred by finding that its “general statements” regarding its business principles—as opposed to “specific statements” related to performance or expectations—can satisfy as inflation-maintaining statements under the theory. Regarding its Basic presumption argument, Goldman’s position was that the newly-introduced media reports demonstrated that the public was made aware of its conflicts of interest related to the Abacus CDO, yet the stock price did not drop, and, therefore, it was the SEC’s enforcement action in 2010 alone that caused Goldman’s stock price to drop.

The panel (with one member dissenting) rejected Goldman’s arguments. First, the court held that precedent neither supported Goldman’s assertion that a stock’s price inflation must have been “fraud-induced,” nor supported the argument that the inflation-maintenance theory should be construed “narrowly” such that courts must distinguish between a defendant’s “general” and “specific” statements when applying the theory. In rejecting this argument, the Second Circuit explained that Goldman’s requested application of the theory would force lower courts into a “merits-based” analysis of whether the alleged misstatements are “immaterial as a matter of law,” which the court explained is inappropriate in a Rule 23 analysis (i.e., whether common questions predominate over individual ones). Second, as to Goldman’s Basic presumption argument, the panel affirmed the district court’s findings, ruling that the lower court “reasonably concluded by a preponderance of evidence that the correct disclosures [in the SEC’s complaint] revealed new and material information to the market.” The panel also agreed with the lower court when it distinguished the media reports that the bank cited, on the one hand, with what the court termed the “hard evidence of Goldman’s client conflicts” alleged in the SEC’s complaint, including internal emails and memoranda. The court noted that this “hard evidence” was “disclosed by a federal government agency,” which in the court’s view made them more “reliable and credible” than the media reports. As the court explained, Goldman failed to rebut Basic by “show[ing] that the market would not have reacted had Goldman told the truth about its alleged failure to manage its conflicts.”

In his dissent, Judge Richard J. Sullivan disagreed with the lower court’s decision to recertify the class because in his opinion Goldman had offered “persuasive and uncontradicted evidence” that its share price was unaffected by the earlier media reports’ disclosures of its alleged conflicts of interests, thereby successfully rebutting theBasic presumption.


On April 9, 2020, in Mehta v. Ocular Therapeutix, Inc., the First Circuit affirmed the dismissal of a shareholder class action suit brought against a biotech life science company, and several of its executives, where plaintiffs claimed violations of Section 10(b) and 20(a) of the Securities Act. The plaintiffs alleged that, in connection with Ocular’s efforts to obtain FDA approval of a drug product, Dextenza, Ocular and its representatives made material misstatements and omissions related to manufacturing challenges the drug faced and the potential impact those challenges might have for obtaining FDA approval. The First Circuit affirmed the lower court’s finding that Ocular did not intentionally mislead investors about Dextenza’s manufacturing problems in light of the company’s disclosed risk factors and other public disclosures.

Plaintiffs filed their complaint on May 7, 2018, immediately after the FDA rejected Ocular’s New Drug Application for Dextenza, primarily relying on allegations that the FDA issued two Forms 483 (often known as “warning letters”) to Ocular. Ocular moved to dismiss plaintiffs’ claims, and on April 30, 2019, the district court granted Ocular’s motion, finding that plaintiffs failed to allege an actionable misstatement or omission or a strong inference of scienter.

On appeal, plaintiffs focused on alleged misstatements contained in Ocular’s 2016 and 2017 Forms 10-K, as well as two statements made by a company executive during a conference call, that related to the company’s “good” and “fully developed” manufacturing practices for Dextenza. Based on the timing of these alleged misstatements, Plaintiffs asserted that a strong inference of scienter could be drawn because the company and its executives knew about the previously issued warning letters that included the FDA’s concerns regarding the product’s manufacturing.

The First Circuit disagreed. Reading “the complaint as a whole” and analyzing the statements in their full context, the First Circuit focused on the company’s risk factors and other public disclosures related to the FDA’s Forms 483 in its Forms 10-K. In doing so, the court found that those fulsome disclosures “undercut any inference that defendants intentionally or recklessly misled investors.” Moreover, the court found that the company and its executives “made pellucid” that Ocular’s manufacturing process was considered deficient by the FDA.


On April 9, 2020, in Robert Hays, et al., v. Jose E. Almeida, et al., the Delaware Supreme Court affirmed the dismissal of the Walgreens’ shareholder derivative action relating to Walgreens’ deal with Theranos Inc., in which Walgreens agreed to pay $140 million for Theranos’ proprietary blood-testing device to be installed at Walgreens’ wellness centers. The Court issued a two-paragraph opinion and without oral argument.

In October 2018, Walgreens’ shareholders filed a derivative suit alleging that Walgreens breached its fiduciary duties by failing to properly vet Theranos before partnering with the company in 2012 to open up blood-testing kiosks in 41 Walgreens stores. The shareholders alleged that Walgreens directors failed in their oversight responsibilities and ignored obvious signs that Theranos was perpetrating a fraud using “unproven” and “unreliable” technology, and that the Walgreens directors were “willfully blind[]” to troubling facts and failed to seek confirmation from Theranos that the device worked prior to installation.

In response, defendants asserted that the shareholders’ claims “contain[ed] no well pleaded allegations that any of the ‘red flags’ were ever raised” with Walgreens’ board. Defendants also pointed to the SEC’s complaint against Theranos, arguing that it showed that “Theranos deliberately deceived Walgreens about the true state of its technology throughout the companies’ partnership.”

In July 2019, Vice Chancellor J. Travis Laster dismissed the shareholder derivative action, finding that plaintiffs had failed to show that it would have been futile to first give the company’s board an opportunity to consider and act on the allegations against 11 directors and a former chief financial officer. Specifically, Vice Chancellor Laster found that Walgreens’ shareholders failed to allege that “the directors knew that Walgreens was violating the law or even engaging in the conduct that risked violating the law.” Relying on the well-known Caremark case, which requires plaintiff shareholders in a derivative suit to show that the directors “utterly failed to implement any reporting system or controls,” or “disabled themselves” from otherwise being informed, Justice Laster explained that “[e]ven when illegality is involved, an oversight claim against directors requires allegations sufficient to support an inference of scienter.”

Dispensing with oral argument, Chief Justice Collins J. Seitz Jr. wrote that a three-justice panel accepted the Vice Chancellor’s conclusions that Walgreens’ stockholders failed to allege a basis for inferring that demand on the company’s board to consider the allegations would have been futile.


On April 7, 2020, in U.S. v. Adams, a Second Circuit panel reversed a lower court’s restitution order in a tax fraud case. The defendant pleaded guilty to failing to pay income tax for 2009, 2011, and 2012. The trial court sentenced the defendant to serve 90 months’ imprisonment and pay $4.9 million in restitution. Following his conviction, defendant appealed on several grounds, including that the district court erred in imposing an order of restitution that commenced immediately upon sentencing. The court affirmed all but one of the trial court’s orders, but ruled that the district court lacked authority to require a defendant to start paying restitution before he had finished serving his prison sentence.

Defendant argued that the district court was not authorized to “issue any restitution order at all,” because “no statute authorizes a court to impose a restitution order when sentencing for violations of the tax code provisions,” and asked the appellate court to vacate the restitution order entirely. While the Second Circuit disagreed with that argument, it nonetheless unanimously held that “Adams is correct that the court exceeded its authority by ordering restitution as part of the judgment to ‘begin immediately,’ since neither 18 U.S.C. § 3663(a) nor § 3663A permits restitution for Title 26 offenses.” The Second Circuit, however, clarified that the trial court could impose restitution in a Title 26 case as a condition of supervised release. Thus, the Second Circuit did not vacate the restitution judgment in its entirety, but, instead, modified it to provide that restitution be imposed only as a condition of supervised release.