Securities Snapshot
August 25, 2020

California Federal Court Denies Motion to Dismiss Securities Class Action Arising from Uber’s IPO

California Federal Court Denies Motion to Dismiss Securities Class Action Arising from Uber’s IPO; S.D.N.Y. Dismisses Ponzi Scheme Action Against HSBC Hong Kong for Lack of Personal Jurisdiction; Delaware Court of Chancery Holds that Shareholders Must Pay Company’s Legal Fees in Appraisal Action; Texas Federal Court Dismisses Securities Fraud Claims Against Pharmaceutical Company Based on Deadlocked FDA Advisory Committee Vote

On August 7, 2020, in Boston Retirement System v. Uber Technologies, Inc., the United States District Court for the Northern District of California denied a motion to dismiss a putative securities class action alleging that rideshare company Uber Technologies, Inc., several of its current and former executives, and the underwriters of Uber’s IPO misled shareholders by inflating the company’s business prospects in light of ongoing legal and financial risks. The plaintiff brought claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, alleging that Uber’s path to its May 2019 IPO was “scarred by scandals” that the company inadequately disclosed or affirmatively misrepresented to shareholders. Specifically, the plaintiff alleged that the defendants misrepresented or omitted material facts regarding Uber’s purported (i) reliance on violating state and local anti-competition laws (and bribes to avoid paying associated fines) to sustain growth, (ii) deteriorating passenger safety record and pattern of workplace sexual harassment, and (iii) unstable financial condition and increasing competition. 

In denying the defendants’ motion to dismiss, the court first held that the heightened pleading requirements for fraud under Federal Rule of Civil Procedure 9(b) did not apply to the plaintiff’s claims, which the amended complaint based on theories of strict liability against Uber and negligence against the remaining defendants (aside from claims based on statements of opinion, which the court held “must be pled with particularity”). Further, the court rejected the defendants’ arguments that the amended complaint rested on impermissible generalized “puzzle pleading,” noting that while the allegations were “long, confusing, and meandering,” they were not so deficient that the defendants were incapable of discerning which statements were allegedly false. The court proceeded to hold that the risk disclosures in Uber’s registration statement, while more specific than mere boilerplate, were inadequate because although they cautioned that Uber’s present and future would not be “blemish-free,” they represented that Uber had “turned over a new leaf” going forward into 2019, such as by hiring a new CEO.The amended complaint, however, alleged that, well into 2019, Uber relied on a “playbook” for growth that the company and its executives knew was “undoubtedly illegal” under state and local laws and that the defendants viewed as “a cost of doing business.” 

In denying the defendants’ motion to dismiss, the court further refused to adopt their truth-on-the-market defense—i.e., that several media articles leading up to Uber’s IPO adequately disclosed the relevant risks—for three reasons.  First, the court held that the truth-on-the-market defense was “less applicable” in the context of Section 11 claims, as opposed claims under Section 10(b) of the Securities Exchange Act of 1934. Second, the court explained that the truth-on-the-market defense is generally not applicable at the pleading stage. Third, the court held that the defendants had not satisfied their “heavy burden” of demonstrating that the truth-on-the-market defense defeated the plaintiff’s claims because the media articles leading up to Uber’s IPO showed only that a reasonable investor “might” have known that the risks to Uber’s business rendered the alleged misstatements and omissions false and misleading.  Finally, the court declined to adopt the defendants’ arguments that the alleged misrepresentations were not actionable; for example, the court found that the alleged misstatements—like “it’s a new day at Uber”—were not immaterial “puffery” when taken in context of allegations that, for example, Uber’s past tolerance of sexual harassment and failure to comply with local laws remained very much present. Likewise, the court held that alleged misstatements framed as opinions were actionable at the pleading stage because the amended complaint satisfied Rule 9(b) in alleging that the defendants had no factual basis for offering such opinions in light of their knowledge of Uber’s deteriorating financial results, which the company disclosed shortly after its IPO. 

This decision underscores that defendants face a significantly more difficult task in obtaining dismissal of Securities Act claims pled on non-fraud theories of strict liability or negligence, even despite risk disclosures that go beyond boilerplate.


On August 10, 2020, in Vasquez v. HSBC Hong Kong, the United States District Court for the Southern District of New York granted HSBC Hong Kong’s motion to dismiss a civil racketeering suit brought by two California investors in a Ponzi scheme known as WCM777, which marketed and sold various cloud-based computing services and guaranteed investors a 100 percent return on investment. 

WCM777 proved to be a pyramid scheme, however, using initial investor funds to make payments for the returns of other investors.  WCM777 opened bank accounts with HSBC Hong Kong and instructed investors to wire their investments to HSBC Hong Kong accounts, but some of those funds were initially transferred through a “correspondent bank account” at HSBC USA in New York.(Correspondent bank accounts are accounts held by foreign banks in domestic banks that are used to facilitate the international flow of capital.)  After researching allegations about WCM777, HSBC Hong Kong and HSBC USA concluded that the entity “reasonably appeared” to be a Ponzi scheme in September 2013, but continued to accept investments in WCM777 for six additional months. 

Initially, a group of plaintiffs brought a substantially similar suit against HSBC Hong Kong and HSBC USA in California federal court, but the court dismissed the action for failure to establish personal jurisdiction over the HSBC entities under California law. When the two California investors subsequently filed suit in New York federal court, the court dismissed the claims against HSBC USA because the complaint failed to allege how the US-based entity aided and abetted the alleged Ponzi scheme.  And while the court held that HSBC Hong Kong’s contacts with New York were not so “continuous and systematic” to establish general personal jurisdiction, the court initially denied HSBC Hong Kong’s motion to dismiss on the pleadings as to specific personal jurisdiction—that is, personal jurisdiction only for claims that arise out of or relate to the defendant’s conduct in the New York forum—and ordered limited jurisdictional discovery.

After jurisdictional discovery and HSBC Hong Kong’s renewed motion to dismiss, the court concluded that the plaintiffs had failed to establish specific personal jurisdiction under New York’s long-arm statute.  Specifically, the court held that the plaintiffs did not show that HSBC Hong Kong transacted business within New York and that plaintiffs’ claims against HSBC Hong Kong for aiding and abetting WCM777 arose from that business activity.  The court focused its analysis on the plaintiffs’ allegations regarding HSBC Hong Kong’s use of its New York correspondent account at HSBC USA, and specifically, three transfers of funds containing the plaintiffs’ investments that flowed through the correspondent bank account to HSBC Hong Kong. Applying New York law, the court held that jurisdictional discovery produced insufficient evidence that HSBC Hong Kong purposefully availed itself of the New York forum via the correspondent bank account because, among other reasons, HSBC Hong Kong’s role in the three sparse transactions “presents as that of a passive recipient, not as an entity actively involved or exercising control” in New York. Accordingly, and in following other federal courts reaching similar holdings, the court found that HSBC Hong Kong’s mere use of a New York-based correspondent account in connection with the plaintiffs’ three transfers was not an act of purposeful availment sufficient to support a finding of specific personal jurisdiction under New York’s long-arm statute. This decision reinforces that the mere passive act of receiving deposits by foreign banking entities that flow through United States correspondent accounts, without more, is insufficient to support personal jurisdiction under New York law.


On August 11, 2020, in Manti Holdings, LLC v. Authentix Acquisition Company, Inc., the Delaware Court of Chancery held that respondent corporation Authentix Acquisition Company, Inc. could enforce a loser-pays fee-shifting provision in a stockholders agreement and seek legal fees incurred in defending against an appraisal action brought by its shareholders. In 2008, the petitioners, investors in private company Authentix, entered into a stockholders agreement whereby they agreed to refrain from exercising appraisal rights “upon the … consummation of a company sale.”  The petitioners also agreed in the stockholders agreement to a fee-shifting provision by which any prevailing party could recover reasonable attorneys’ fees and expenses in connection with any legal proceeding. In 2017, the company’s board approved a merger agreement that provided for a sale of Authentix to a private equity firm. After the petitioners filed a statutory appraisal action in the Delaware Court of Chancery, the court granted Authentix’s motion for partial summary judgment, holding that the petitioners clearly and unambiguously waived their statutory rights to appraisal in the stockholders agreement. The parties’ dispute then focused on attorneys’ fees, with Authentix moving for summary judgment as a prevailing party under the fee-shifting provision in the stockholders agreement.

Although the court noted that Delaware typically follows the default “American rule” that litigants must bear their own costs, it concluded that the clear and unambiguous “loser pays” fee-shifting provision in the stockholders’ agreement triggered an exception to the default American rule. Although the petitioners did not dispute that the fee-shifting provision was a clear contractual obligation for the losing party to pay fees incurred by the prevailing party, they argued that the fee-shifting provision was unenforceable for reasons including statutory precedence, public policy, and equity. For example, the petitioners argued that because Delaware law prohibits fee-shifting provisions in corporate charters and bylaws, by extension the same statutes prohibited contractual fee-shifting arising out of appraisal rights.  But the court rejected that argument, explaining that nothing in the Delaware statutes prohibiting fee-shifting provisions in charters and bylaws more generally prevented shareholders from agreeing to such provisions in other contracts involving all intra-party litigation, such as appraisal actions. The court also relied on legislative history, including a synopsis of the bill prohibiting fee-shifting provisions in charters and bylaws that expressly carved out fee-shifting provisions in stockholders agreements. This decision is noteworthy because it may deter future Delaware appraisal actions arising out of sales of private companies.


On August 14, 2020, in Callinan v. Lexicon Pharmaceuticals, Inc., the United States District Court for the Southern District of Texas granted a motion to dismiss a putative securities class action against Lexicon Pharmaceuticals, Inc., a pharmaceutical company that developed the diabetes drug candidate Zynquista, and several of the company’s officers. In January 2019, an FDA advisory committee deadlocked by a vote of eight-to-eight as to whether phase 3 clinical trial results for Zynquista were sufficient to conclude that the drug candidate’s benefits outweighed its risks, which resulted in non-approval of Lexicon’s new drug application for Zynquista. In voting not to approve Zynquista, members of the FDA advisory committee voiced safety concerns regarding, among other things, a significant increase in occurrences of Diabetic ketoacidosis (a complication where a patient’s body produces dangerously high levels of blood acids) among Zynquista patients compared to placebo, and efficacy concerns regarding the appropriateness of the trials’ composite endpoint. Lexicon’s stock price fell approximately 22 percent following the vote, and the plaintiffs filed suit under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs alleged that the defendants, during a three-and-a-half year class period, misleadingly touted Zynquista’s clinical trial results and the probability of FDA approval while concealing concerns communicated by the FDA to the company.

In a 114-page decision granting the defendants’ motion to dismiss, the court concluded that the plaintiffs’ allegations were “analogous to allegations of fraud by hindsight.” First, the court held that the alleged misrepresentations and omissions were not actionable for an array of reasons. For example, in rejecting allegations premised on quotations from the FDA advisory committee meeting during which an FDA representative alluded to previously-voiced “concerns” about Zynquista’s endpoint, the court held that the complaint failed to plead with particularity “facts showing when, where, to whom, or how the FDA concern[s] about the composite endpoint was communicated” to Lexicon. Further, the court held that alleged omissions regarding an eight-fold increase in adverse events were rendered non-actionable by the fact that Lexicon disclosed complete clinical trial results from which the specific “fold increases of [such events] could easily be calculated from the information disclosed.” Second, the court held that the plaintiffs failed to plead a strong inference of scienter as required by the Private Securities Litigation Reform Act of 1995. The court held that neither generalized allegations that the defendants designed the phase 3 trials and had access to trial results nor vague recollections from former Lexicon employees acting as confidential witnesses demonstrated that any of the defendants made any conscious misrepresentation. Specifically as to the two confidential witnesses, the court explained that the plaintiffs failed to allege that either former employee presented information to or about any defendant capable of demonstrating that the defendants knew or should have known that the alleged misrepresentations were false or misleading when made. Third, the court found that the amended complaint failed to plead loss causation because “simply alleging that plaintiffs purchased Lexicon’s common stock at inflated prices and that the stock price fell after negative news” was not sufficient.  Finally, the court rejected the plaintiffs’ informal request for leave to file a second amended complaint, finding that leave to amend would be futile because the plaintiffs already “pleaded their best case” in their 88-page amended complaint.