Securities Snapshot
June 16, 2020

Third Circuit "Clarifies" That Courts May Award Attorney's Fees to Settlement Objectors Based on Non-Pecuniary Benefits

Third Circuit holds that settlement objectors may be awarded attorneys’ fees based on non-pecuniary benefits; SEC announces largest-ever whistleblower award to an individual; DOJ issues revised corporate compliance guidelines; Ninth Circuit affirms dismissal of illogical securities-fraud allegations; DOJ files first criminal securities-fraud complaint related to the coronavirus pandemic; Delaware Chancery court refuses to dismiss stockholder suit regarding $24 billion Dell stock-redemption deal.

In a precedential opinion issued on June 4, 2020, the Third Circuit held that objectors to class-action and derivative settlements may be awarded attorneys’ fees for bringing non-monetary benefits to settlements.

The case, In re S.S. Body Armor, had taken a complicated journey through multiple jurisdictions before arriving at the Third Circuit. It began after Body Armor’s stock price collapsed upon revelations that the company was manufacturing its body armor with substandard materials, which prompted a number of derivative and class-action shareholder suits. The class-action and derivative suits were separately consolidated in the Eastern District of New York (EDNY), and the parties reached a settlement in late 2006. D. David Cohen, a Body Armor shareholder who had once been general counsel for the company, objected to the settlement, particularly to a provision indemnifying David H. Brooks, the former chairman and CEO of the company, from any liability he might incur in the event the Securities Exchange Commission (SEC) instituted a suit against him under section 304 of the Sarbanes-Oxley Act (a SOX 304 action). The SEC in fact did institute a SOX 304 action against Brooks for disgorgement of $186 million in profits, and Brooks was indicted and ultimately convicted for various financial crimes. Nevertheless, the federal court in EDNY approved the settlement and overruled Cohen’s objection.; On appeal, the Second Circuit vacated the judgment in the derivative suit, siding with Cohen as to his objections. Following the Second Circuit’s decision, the parties negotiated a new settlement, which was approved by a Delaware federal bankruptcy court presiding over Body Armor’s bankruptcy. The bankruptcy court awarded Cohen attorneys’ fees for improving the settlement, but made the award contingent on the company’s estate receiving funds from the SOX 304 action. Cohen in turn appealed the bankruptcy court’s order as to several issues, including the conditional grant of attorneys’ fees. The Delaware federal district court affirmed the bankruptcy court in all respects.

On appeal, the Third Circuit affirmed as to several issues raised in Cohen’s objections, but reversed on the issue of the conditional grant of attorneys’ fees. The Third Circuit observed that while courts were in agreement that attorneys’ fees should be awarded to objectors whose efforts “improve” settlements, courts were split over whether the benefit need be directly monetary. While acknowledging that its previous decisions had “suggested” that the objector “may need to improve a settlement monetarily” to be awarded a fee, the Third Circuit “clarif[ied]” that, “in both class and derivative actions, trial courts may, in their discretion, consider non-monetary factors in determining whether an objector’s participation improved a settlement.” The court noted that this rule may be especially important to derivative suits, where the improvements brought by objectors “may be less susceptible to straightforward financial evaluation.”

The court held that, under this standard, the bankruptcy court erred in granting Cohen only a conditional award and faulted the court for focusing excessively on whether Cohen had brought a direct pecuniary benefit to Body Armor’s estate or contributed to the settlement fund. Taking a broader view, the Third Circuit found that Cohen brought a number of benefits to the settlement: not just “preserving the possibility of the $186 million recovery” under the SOX 304 action, but also stripping the original agreement of a massive indemnification liability, as well as preserving funds for and making possible the superior final settlement. While holding that Cohen was entitled to an unconditional award, the Third Circuit declined to specify the value of the award or how it should be calculated.

The decision underlines that courts may take a more flexible and pragmatic approach to evaluating whether settlement objectors have brought a “benefit” to the settlement process.


On June 4, 2020, the SEC announced an award of nearly $50 million to a whistleblower—its largest-ever award to a single person under the whistleblower program. The announcement credits the whistleblower, whose identity remains confidential under the Dodd-Frank Act, with “detailed, firsthand observations of misconduct by a company, which resulted in a successful enforcement action that returned a significant amount of money to harmed investors.”

Previously, the largest award to a single individual under the program was an award of $38 million in 2018; the same year, two individuals shared an award of nearly $50 million. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, noted that the “award marks several milestones for the whistleblower program,” because the award “is the largest individual whistleblower award announced by the SEC since the inception of the program, and brings the total awarded to whistleblowers by the SEC to over $500 million” to some 83 individuals since the program began in 2012, “including over $100 million in this fiscal year alone,” a testament to what Norberg called the “critical” function performed by whistleblowers.

The awards are paid out of a fund established by Congress, which is financed entirely by SEC penalties paid by securities-law violators. The awards are available when whistleblowers “voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action,” and “range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.”

DOJ issues revised corporate compliance guidelines

On June 1, 2020, the Criminal Division of the Department of Justice (DOJ) published a revision to its “Evaluation of Corporate Compliance Program” guidelines. Some of the so-called “Filip factors” prosecutors are instructed to consider when deciding whether to bring charges against corporations involve the corporation’s legal compliance program, and the DOJ’s compliance program guidelines inform those factors. While the revisions do not effect any large-scale change to the compliance program guidelines, they underscore DOJ’s increased focus on several issues, particularly adequate resources and empowerment for the compliance program; the need for compliance reviews to be ongoing and not limited to a “snapshot”; the need to include third-party partners of the corporation in compliance reviews throughout the duration of the relationship with the third party; commitment to compliance at all levels of the company; and the importance of tracking the effect of the compliance program on employees and operations.

The June 2020 revision adds language that asks whether the compliance program is “adequately resourced and empowered to function” effectively, suggesting that this is the key criterion for evaluating whether the program is “being applied earnestly and in good faith.” New language further underscores the guidelines’ previous advice that corporations must show a commitment to compliance “at all levels of the company.”

In addition, the revision adds language asking whether any “periodic review” of the corporation’s “risk assessment” is “limited to a ‘snapshot’ in time” or is instead “based upon continuous access to operational data and information across functions,” as well as whether the review has “lead to updates in policies, procedures, and controls.” The revision emphasizes that prosecutors should seek to understand “why and how the company’s compliance program has evolved over time.” The updated guidelines also include a new subsection on “Data Resources and Access,” which asks whether compliance personnel have access to the data necessary to test the effectiveness of the compliance program.

The revision expands the guidelines’ discussion of how the compliance program accounts for third-party relationships with the corporation, and asks whether “the company engage[s] in risk management of third parties throughout the lifespan of the relationship, or primarily during the onboarding process.” As to mergers and acquisitions, the updated guidelines include new language highlighting the need for post-acquisition “integration of [an] acquired entity into existing compliance program structures and internal controls,” as well as the importance of post-acquisition audits.

The revisions underscore DOJ’s increased interest in ensuring that corporate compliance efforts are ongoing, evolving, regularly assessed, and adequately resourced, and companies should evaluate their compliance programs with these interests in mind.


Underscoring the fact that that federal courts need not accept securities-fraud allegations at face value where they are illogical, the Ninth Circuit affirmed dismissal of a putative securities class action in an opinion issued on June 10, 2020. The case involved Endologix, Inc., a publicly traded company focused on the manufacture and sale of medical devices treating abdominal aortic aneurysms. Among other products, Endologix worked on developing Nellix, which was designed to treat abdominal aortic aneurysms through a new method known as endovascular sealing. Endovascular sealing is thought to reduce certain post-procedure complications associated with aneurysm repair devices, including “migration,” which occurs when a device moves from the location where it was originally placed, and which can lead to aneurysm expansion and rupture.

Endologix faced difficulties in the regulatory approval process for Nellix in the United States. At first, the Food and Drug Administration (FDA) delayed approval by eighteen months from the original timeline. In May 2017, the company announced it would abandon seeking FDA approval for Nellix, and would instead focus on a second-generation device that would not receive FDA approval until 2020 at the earliest. The same day as that announcement, the company’s stock fell by more than 36%.

According to the plaintiff’s amended class-action complaint, which was filed in the Central District of California and alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the company and its CEO and CFO made knowingly false statements about the prospects of FDA approval of Nellix. Relying heavily on allegations from an anonymous company witness (CW), the complaint claimed that the company and top executives knew, based on their experience with the product in Europe, that Nellix had serious migration issues that would lead to denial of FDA approval. Despite this, defendants allegedly repeatedly assured investors that Nellix would secure FDA approval.

The Ninth Circuit affirmed the district court’s dismissal of the compliant under the pleading standards established by the Private Securities Litigation Reform Act (PSLRA). Under the PSLRA, a plaintiff must make a heightened showing of scienter, which amounts to knowledge or deliberate recklessness of falsity. Under that heightened standard, the court found that the central premise of the amended compliant—that defendants knew that the FDA would not approve Nellix, but nevertheless represented to the public that the drug would pass muster—did “not make a whole lot of sense.” As the court noted, “the PSLRA neither allows nor requires us to check our disbelief at the door.” Instead, much like the more ordinary pleading standards under Rule 8, as established in the Supreme Court’s landmark Twombly and Iqbal decisions, the court concluded that the PSLRA requires it to reject implausible allegations, particularly where a more reasonable explanation of the defendants’ conduct presents itself. The Ninth Circuit panel found support for this in a Fourth Circuit decision, Cozzarelli v. Inspire Pharmaceuticals Inc., 549 F.3d 618 (4th Cir. 2008), that similarly found implausible allegations that a pharmaceutical company knew studies of its drug would fail, yet touted the studies’ likely success to the public.

The Ninth Circuit found that plaintiff’s particular allegations did not “surmount her plausibility problem.” The amended complaint’s reliance on the CW allegations was flawed, because the CW left Endologix before the company began receiving less favorable data on Nellix and migration issues. And the CW allegations were “high on alarming adjectives,” but “short on the facts about Nellix migration that would establish” a strong inference of scienter. Further, much of the internal concerns about migration in Nellix discovered in Europe were made public in a conference in London; and a study showing migration in some Nellix devices was discussed on an investor conference call. While plaintiff also pointed to evidence of migration in a UK case report on a single patient, the amended complaint did not convincingly explain why this would point to a larger problem Nellix had with migration. The more plausible inference from the facts alleged, the court concluded, “is that defendants made promising statements about the timing of FDA approval based on the initial results of the U.S. clinical trial, but then modulated their optimism when the results began to raise more questions.” The Ninth Circuit also affirmed the district court’s denial of leave to amend the complaint again.


On June 8, 2020, the U.S. Department of Justice filed its first criminal complaint alleging securities fraud related to the COVID-19 pandemic. The complaint names as a defendant Mark Schena, the president of Arrayit Corporation, a publicly traded medical-technology company based in northern California. Arrayit claims to employ a “microarray technology” for allergy and COVID-19 testing using a finger-prick drop of blood that is placed on a paper card and analyzed in a laboratory; Arrayit marketed itself as the only company that uses the test, and claimed that the test uses drops of blood “which are 250,000 times smaller than the volume of the Theranos nanotainer.”

The DOJ’s complaint alleges that Schena paid kickbacks and bribes to encourage use of Arrayit’s test for some 120 allergens without regard to medical necessity, and that the test’s results “have little clinical relevance to the treatment of allergy symptoms.” In the meantime, Schena aggressively touted the test and the company’s growth on social media without disclosing the improper means the company used to encourage the tests to be performed and billed, and “while also touting purported partnerships with Fortune 500 companies, government agencies, and public institutions that were non-existent or materially misleading.” In March 2020, Arrayit also began pushing its test as effective for COVID-19, and encouraged recruiters to use the test on both COVID-19 and allergens regardless of medical necessity. But the company had not actually begun developing or running the tests for COVID-19 at the time of the announcement, and the company failed to disclose that the FDA had informed it in April 2020 that its COVID-19 test did not meet an acceptable level of performance. The complaint alleged that, from 2018 to the present, Arrayit had submitted over $5.9 million in Medicare claims and $63 million in private-insurance claims, and had received $290,000 in payment from Medicare and $290,000 from private-insurance plans, for testing that was procured through illegal kickback payments, was not medically necessary, or was not provided as represented.

Also on June 8, 2020, the SEC filed a separate civil complaint against Arrayit investor Jason C. Nielsen, who owned about 10% of the company’s stock. The complaint accuses Nielsen of engaging in a “pump-and-dump” scheme by misleadingly encouraging investors through an internet forum to purchase Arrayit stock without disclosing that he was “aggressively selling his shares,” and by inflating demand for the stock through “spoofing,” or placing and then canceling large orders for the company’s shares. Nielsen allegedly earned $137,000 from the scheme over the course of six weeks, until the SEC temporarily froze trading in Arrayit stock in April 2020. The complaint alleged violations of Sections 9(a)(2) and 10(b) of the Exchange Act of 1934, as well as Rule 10b-5.


In a significant opinion underscoring that Delaware courts will look beyond superficial compliance with Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014) and will perform a searching analysis for potentially coercive elements that dilute that case’s curative properties, the Delaware Chancery Court denied a motion to dismiss a shareholder lawsuit challenging a $24 billion stock-swap deal through which Dell Technologies Inc. consolidated its control over VMware, Inc., a publicly traded cloud-computing and virtualization company The court held that the plaintiffs’ complaint successfully pleaded that the defendants—four Dell directors, Dell founder and director Michael Dell, and controlling investor Silver Lake Group—had failed to qualify for the safe harbor established by MFW, so that the transaction would be evaluated under the rigorous entire fairness standard, rather than the forgiving business judgment rule, and the case would move forward to discovery.

The stock swap concerned Class V shares issued by Dell in connection with its acquisition of EMC Corporation, a data-storage firm that owned a large majority of VMware’s stock. The Class V stock traded publicly and was meant to track the performance of a portion of the equity stake Dell owned in VMware as a result of the EMC deal. In fact, the Class V shares traded at a 30% discount (the Dell Discount), at least in part because they were subject to a conversion right, under which Dell could forcibly convert the Class V shares to Class C shares according to an unpredictable pricing formula (the Forced Conversion). The complaint alleged that it was widely perceived in the market that the Forced Conversion could be invoked by Dell in a manner that disadvantaged holders of the Class V shares. After the EMC deal, Dell began exploring ways in which it could consolidate ownership of VMware. The three options were (1) a transaction with VMware; (2) a redemption of the Class V stock; or (3) invocation of the Forced Conversion.

In early 2018, Dell’s board charged a special committee to begin negotiating redemption of the Class V shares, and attempted to ensure that the deal would qualify for MFW’s safe harbor by conditioning any transaction on (a) committee approval and (b) approval from holders of a majority of the outstanding Class V shares. But Dell reserved the right to bypass the process by engaging in the Forced Conversion. Over the next few months of negotiations between Dell and the special committee, the committee was repeatedly told that if a negotiated redemption were not agreed, the Company would engage in a Forced Conversion. When the committee agreed to a redemption scheme, large holders of the Class V stock objected, and Dell began negotiating directly with six of those large holders, all the while taking steps to publicly prepare for a Forced Conversion. Dell reached a redemption deal with these large holders after several months of negotiations in which the special committee was not involved. Dell informed the committee of the terms of the deal on November 14, 2018, and the committee approved the deal after an hour-long meeting. Unaffiliated holders of 61% of the outstanding Class V shares approved the redemption on December 11, 2018, and the deal closed two weeks later. Plaintiffs, former holders of Class V stock, then filed suit.

Reviewing the motion to dismiss, the court focused on four conditions necessary for obtaining MWF cleansing: (1) whether the company properly conditioned the transaction on both a favorable committee recommendation and a properly constitution stockholder vote; (2) whether the special committee or stockholders were coerced; (3) whether a majority of the special committee was disinterested and independent; and (4) whether the shareholder vote was fully informed.

As to factor 1, the court found that plaintiffs successfully alleged that Dell “did not empower the Special Committee and the Class V stockholders with the ability to say no” by excluding the Forced Conversion from the scope of the special committee’s mandate, and because Dell ultimately bypassed the special committee to negotiate directly with certain large holders. As to factor 2, the court concluded, after a thorough survey of coercion under Delaware corporate law, that the complaint plausibly alleged the presence of several possible forms of coercion: the “steady drumbeat of actions by which the Company signaled its intent to exercise the Conversion Right in the absence of a negotiated redemption,” which could have pressured the stockholders to approve the transaction for reasons other than its merits, and which could be considered improper threats; the fact that the stockholders had no way of escaping the Dell Discount, which left stockholders “with an impossible choice between an unappealing status quo and an alternative which, although unfair, was better than their existing situation”; and the bypassing of the special committee, which potentially “created a coercive environment” undermining the special committee. As to factor 3, the court found that the complaint plausibly alleged that both members of the special committee were not disinterested and independent. Finally as to factor 4, the court found that the complaint plausibly alleged that shareholders were not fully informed by virtue of alleged omission or misstatement of three issues in a proxy statement and supplement issued in connection with the transaction: the special committee’s proposed price for the redemption during negotiations on November 8, 2018; information regarding a financial advisor to the special committee and the advisor’s compensation arrangement, made material given plausible allegations of the advisor’s “lack of experience and murky history” and status as a one-person firm operated by someone with a history of managing entities with financial difficulties; and information regarding a recent evaluation that suggested the Class C stock was worth far less than it was priced in the redemption.

Finally, the court dismissed the claims as to one director, because it found that the director, who identified a conflict early in the process and recused herself, could not plausibly be alleged to have acted disloyally or in bad faith, and so she was protected by an exculpation provision.