Securities Snapshot
May 4, 2021

Eighth Circuit Overturns Class Certification in Suit Against TD Ameritrade Holding Corp., Holding Individualized Evidence Is Required for Each Putative Class Member

Eighth Circuit Overturns Class Certification in Suit Against TD Ameritrade Holding Corp., Holding Individualized Evidence is Required for Each Putative Class Member; District Judge Approves Magistrate’s Recommendation to Deny Dismissal of Putative Securities Class Action and Expressly Declines to Overrule Ninth Circuit Precedent Supporting Private Parties’ Right of Action Under Section 14(e); Northern District of Illinois Allows Securities Class Action to Proceed Against Exelon Over Bribery Scheme; Ninth Circuit Affirms Dismissal With Prejudice of Putative Securities Class Action Against Gigamon.

On April 23, 2021, in Roderick Ford v. TD Ameritrade Holding Corp. et al, a three-judge panel of the Eighth Circuit Court of Appeals reversed the district court’s certification of a class of retail investors in a lawsuit against TD Ameritrade Holding Corp., its former president and its subsidiary, TD Ameritrade, Inc. (“TD Ameritrade”), claiming that TD Ameritrade violated its “duty of best execution” when it implemented order routing practices that allegedly favored trading venues which generated the most profit for TD Ameritrade instead of providing the best outcome to its customers. Such practices allegedly left orders unfilled, filled orders at sub-optimal prices, and filled orders in ways that negatively impacted the outcome for customers after execution, all in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

Lead plaintiff’s attempt to certify the class in 2017 was initially recommended for denial by the magistrate judge who concluded that the proposed class did not meet the requirements of the Rule 23(b)(3) of the Federal Rules of Civil Procedure. The judge reasoned that determining whether each TD Ameritrade customer suffered economic loss as a result of the company’s order routing practices would entail an order-by-order inquiry, and that common issues thus did not predominate over individual questions, as required. However, on review of the recommendation, the district court determined that an algorithm developed by lead plaintiff’s expert would permit the automatic determination of loss for each customer, therefore solving the predominance issue. The Eighth Circuit later granted defendants leave to appeal the class certification order.

On appeal, lead plaintiff argued that its expert’s algorithm was capable of analyzing hundreds of millions of data points to assess the execution quality by comparing TD Ameritrade customer’s trading data with data concerning the state of the market when each trade was executed. Lead plaintiff’s expert specifically claimed that it was possible to establish whether a better price was available for each of the trades by comparing the actual price of each trade to the National Best Bid and Order (“NBBO) price, which provides the highest and lowest prices that buyers and sellers were respectively willing to pay and accept for a particular stock at a given time. But, writing for the three-judge panel, Circuit Judge Steven M. Colloton rejected the algorithm, noting, among other things, that trades on occasion fail to execute at the NBBO price for reasons outside of the control of the broker, such as volatile or unusual market conditions. And, even though both parties agreed that certain transactions would therefore have to be excluded to account for such instances, the parties could not agree on which transactions should actually be excluded.

Finding that a case-by-case analysis was indeed required to determine each class member’s economic loss, the Eighth Circuit concluded that the district court had abused its discretion in certifying the class under Rule 23(b)(3). The Eighth Circuit, thus, reversed the district court’s order and remanded the case for further proceedings.

District Judge Approves Magistrate’s Recommendation to Deny Dismissal of Putative Securities Class Action and Expressly Declines to Overrule Ninth Circuit Precedent Supporting Private Parties’ Right of Action Under Section 14(e)

On April 22, 2021, in Brown v. Papa Murphy’s Holdings Inc., Western District of Washington District Court Judge Benjamin H. Settle adopted the January 21, 2021 report and recommendation of U.S. Magistrate Judge J. Richard Creatura, which recommended that the Court deny the defendants’ motion to dismiss a putative securities class action against Papa Murphy’s and its former CEO. Lead plaintiff alleged that defendants violated Sections 14(e) of the Securities Exchange Act of 1934 by understating financials — ahead of an April 2019 merger with MTY Food Group Inc. — for the purpose of inducing investors into approving the merger at an unfairly low price. Judge Settle’s decision comes after Magistrate Judge Creatura previously recommended dismissal of lead plaintiff’s First Amended Complaint without prejudice. Lead plaintiff subsequently filed a Second Amended Complaint (“SAC”), which Papa Murphy’s moved to dismiss.

Papa Murphy’s argued that Magistrate Judge Creatura erred in recommending denial of its motion to dismiss because the SAC failed to allege new facts and address the pleading deficiencies that resulted in the prior dismissal. Specifically, Papa Murphy’s argued that plaintiff failed to allege facts that demonstrated that representations made by Papa Murphy’s and its financial advisor were both “objectively and subjectively false” and that “[t]he magistrate judge mistook the cosmetic changes in the SAC for new substantive allegations[.]” The Court disagreed, finding “material differences between the first amended complaint and the SAC, which the magistrate’s recommendation rightfully credits as plausible allegations evidencing the [company’s financial projections’] objective and subjective falsity.”

In addition, the Court once again rejected defendants’ attempt to disturb current Ninth Circuit precedent (Varjabedian v. Emulex Corp.) holding that Section 14(e) provides private plaintiffs with a right of action under a negligence standard — rather than the harder-to-prove standard of scienter, i.e., intentional deception. In 2019, the U.S. Supreme Court granted a writ of certiorari to review the Ninth Circuit’s Emulex holding — which is in express disagreement with five other courts of appeals — but then dismissed the writ as improvidently granted. Magistrate Judge Creatura previously rejected defendants’ argument that Section 14(e) does not provide such a private right of action in his earlier May 20, 2020 report recommending dismissal of the first amended complaint without prejudice.

Regardless, District Judge Settle held that the magistrate’s current recommendation correctly applied existing Ninth Circuit law, stating that “even if there is some logic in Defendants’ arguments ... [a]bsent a directive from the Ninth Circuit or the Supreme Court ... the Court will not overturn precedent in holding that no private right of action for negligence-based claims exists.” The Court’s decision in Papa Murphy’s potentially tees the issue up again for future Supreme Court review.

Northern District of Illinois Allows Securities Class Action to Proceed Against Exelon Over Bribery Scheme

On April 21, 2021, in Flynn v. Exelon Corp. et al., the Northern District of Illinois allowed a putative class action to proceed against Exelon Corporation (“Exelon”), its subsidiary the Commonwealth Edison Company (“ComEd”), and certain Exelon and ComEd executives.

Plaintiff alleged that defendants violated Sections 10(b) and 20(a) of the Exchange Act, along with Rule 10b-5 by making false and misleading statements related to a bribery scheme involving defendants’ lobbying program. Specifically, plaintiff alleged that, over the course of eight years, Exelon and ComEd funneled over a million dollars to an Illinois lawmaker’s “political allies” and performed other favors in exchange for the passage of legislation favorable to Exelon and ComEd. ComEd ultimately entered into a Deferred Prosecution Agreement, in which ComEd admitted that it made these payments to gain influence, and that certain of its senior executives were aware of the payments and their purpose. Plaintiff alleged that defendants made false and misleading statements that misrepresented this scheme and the corresponding benefits to the companies. All defendants moved to dismiss, arguing that plaintiff had failed to state a claim.

The district court denied defendants’ motions to dismiss. Defendants first argued that plaintiff failed to satisfy Rule 9(b)’s pleading standard by not attributing false statements to each defendant with particularity. The Court rejected this argument, holding that plaintiff actually had identified the makers of each statement at issue.

The court also rejected defendants’ argument that the companies had no duty to disclose information concerning the bribery scheme. The court reasoned that, although the federal securities law do not create a duty to disclose all material information, plaintiff had sufficiently alleged that defendants nevertheless had a duty to disclose the scheme under Items 105 and 303 of SEC Regulation S-K, which the court held require disclosure of regulatory noncompliance. Defendants also argued that their statements relating to risk factors, lobbying activities, and other statements were not false or misleading. The court rejected this argument, holding that plaintiff had adequately alleged that such statements were materially misleading because they did not disclose the bribery scheme despite defendants’ actual knowledge of the bribery scheme.

Third, applying the heightened PSLRA standard, the court held that plaintiff had sufficiently alleged scienter. The court rejected defendants’ argument that plaintiff had conflated defendants and engaged in impermissible group-pleading, holding that defendants had “fail[ed] to provide a single example” of such impermissible pleading. The court also held that plaintiff had sufficiently pled defendants’ motive by alleging that the scheme was worth millions of dollars and that the individual defendants had access to relevant documents pertaining to their allegedly false statements and even oversaw the lobbying activities in question. Finally, because the court declined to dismiss the claims for primary liability under Section 10(b) and Rule 10b-5, the court likewise declined to dismiss the claims for alleged control person liability under Section 20(a).

Ninth Circuit Affirms Dismissal With Prejudice of Putative Securities Class Action Against Gigamon

On April 20, 2021, in Golub v. Gigamon Inc., the Ninth Circuit affirmed a district court’s dismissal with prejudice of a putative class action brought by stockholders of Gigamon Inc. (“Gigamon”), against the company, its CEO, and the members of its Board of Directors, as well as various other corporate defendants purportedly involved in facilitating the alleged securities laws violations.

Plaintiffs alleged that Gigamon, its CEO, and the members of its Board of Directors made material misrepresentations and omissions in a proxy statement in violation of Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 14a-9 promulgated thereunder, in an effort to ensure shareholder support for a sale of the company. Plaintiffs also alleged violations of Section 20(a) of the Exchange Act against several defendants arising from their alleged facilitation of Gigamon’s violation. The district court dismissed plaintiffs’ complaint with prejudice, holding that plaintiffs had failed to plead false misrepresentations or omissions sufficient to overcome the safe-harbor provision of the Private Securities Litigation Reform Act (“PSLRA”). Plaintiffs appealed.

A panel for the Ninth Circuit affirmed the district court’s dismissal. The Court explained that Rule 14a-9 prohibits the issuance of proxy statements that are false or misleading with respect to any “material fact,” or that omit to state any “material fact” necessary to make the statements therein not false or misleading. The Court observed that, despite Rule 14a-9’s use of the word “fact,” courts long have permitted plaintiffs bring Rule 14a-9 claims based on false statements of opinion within a proxy statement, as statements of opinion can be factual in two ways: as statements that directors do, in fact, act for a stated reason; and as statements about the subject matter of the reason or belief expressed. 

Notably, the Court then took the analysis one step further, holding that the standards for alleging falsity of opinions under Section 11 of the Securities Act of 1933 (“Securities Act”), as set forth in the U.S. Supreme Court’s recent decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, apply equally to claims under Section 14(a) and Rule 14a-9. In Omnicare, the Supreme Court held that statements of opinion may be actionable representations of material facts in three ways: (1) as affirmations that the speaker holds a certain opinion; (2) as statements that include embedded statements of fact; or (3) as statements of the basis of an opinion. Such statements may give rise to omission liability.

Applying Omnicare, the Ninth Circuit, in a separate memorandum, first held that plaintiffs had failed to allege facts plausibly establishing that the defendants did not actually hold the opinions expressed; rather, based on the allegations, it was just as plausible that the defendants held positive views of the company’s long-term future as it was that the defendants actually believed that the company should be sold given that the company had reported disappointing results for two consecutive quarters leading up to the proxy statement. Simply put, the allegations did not plausibly establish that the defendants believed one thing, but stated another. Second, the Court held that plaintiffs failed to establish that any statement of opinion contained actionable, embedded statements of fact. For one thing, most of the alleged embedded statements of fact were protected by the PSLRA’s safe harbor as forward-looking statements accompanied by meaningful cautionary language. As to the lone embedded statement of fact that was not protected by the PSLRA’s safe harbor — i.e., that “the Company was currently performing at levels even below” certain projections on which the directors relied at a specific point in time — plaintiffs alleged no facts establishing that this statement was false and, indeed, alleged no facts at all about the company’s performance at the specific time in question. Finally, the Court held that plaintiffs had failed to sufficiently allege an actionable omission based on the company’s non-disclosure of partial, intra-quarter results that were more positive than the preceding two quarters’ results on which the defendants claimed to have relied. As the Court held, one quarter (or part of one quarter) of positive results did not render misleading defendants’ statements about the company’s continued challenges, which, in any event, were protected by the PSLRA’s safe-harbor. 

As the Court affirmed the district court’s dismissal of plaintiffs’ claims for a primary violation of Section 14(a) and Rule 14a-9, the Court also affirmed the dismissal of the plaintiffs’ claims under Section 20(a).

Morgan Mordecai

Viktors M. Dindzans