Securities Snapshot
June 1, 2021

Federal Reserve Hints at Government-Backed Cryptocurrency

Federal Reserve Hints at Government-Backed Cryptocurrency; Third Circuit Affirms Dismissal of Securities Fraud Class Action Against Shutterfly Inc. Regarding Allegedly Misleading Financial Projections; Ninth Circuit Holds Federal Loss Causation Standard Not Met in Investor’s State Law Securities Action Against Uber; Taking Judicial Notice of SEC Cease and Desist Order, District of Maryland Denies Under Armour’s Bid to Dismiss Investor Securities Suit.

On May 24, 2021, Lael Brainard, a member of the Board of Governors of the Federal Reserve, said during a CoinDesk virtual conference that “the Federal Reserve is stepping up its research and public engagement” on the possibility of a U.S. central bank digital currency. Brainard cited the need to understand the “benefits and risks” of such digital currencies in the United States before commenting that the Federal Reserve Board will publish a paper this summer outlining the Board’s “current thinking” on the subject.

In her remarks, Brainard noted four developments leading the Board to “sharpen[]” its focus on a central bank digital currency. First, “the growing role of digital private money” may cause “fragment[ation]” of “payment systems” in the United States, which could in turn result in “consumer protection and financial stability risks.” Second, Brainard said that the recent “migration to digital payments” spurred, in part, by the Covid-19 pandemic raised questions concerning how to “ensure consumers retain access to a form of safe central bank money.” Third, as foreign countries have developed and even launched their own digital currencies, Brainard stressed the need for the United States to be “at the table in the development of cross-border standards” regarding digital currencies. Fourth, and finally, Brainard explained “the benefits of” central bank digital currencies, including their ability to “deliver[] payments more quickly, cheaply, and seamlessly through digital means” — a benefit that came to light as a result of the particular difficulties the government faced in issuing recent pandemic-relief payments.

Brainard went on to discuss several top-of-mind considerations in exploring a central bank digital currency, including the associated benefits and potential “costs and risks.” Importantly, although Brainard touted the benefits of a central bank digital currency, she explained that it should “complement,” rather than replace, traditional “currency and bank accounts.” She also cautioned that there are open questions about how these digital currencies could impact “financial stability,” such that “safeguards” would be needed, including those to ensure user privacy. Brainard concluded her remarks by explaining the “technological and policy” research the Federal Reserve will need to conduct, in addition to that which is already underway, and stressing the need for the Federal Reserve to step up its research efforts concerning a “digital version of the U.S. dollar.”

Brainard’s remarks come after other countries, such as China, have implemented or explored implementing their own government-backed cryptocurrencies. Brainard heavily noted such developments, stressing, if nothing else, the need for the United States to be involved in crafting the standards for the use of such currencies in cross-border payments.

Third Circuit Affirms Dismissal of Securities Fraud Class Action Against Shutterfly Inc. Regarding Allegedly Misleading Financial Projections

On May 21, 2021, in Garfield et al. v. Shutterfly, Inc. et al., No. 20-cv-2249 (3d Cir.), the U.S. Court of Appeals for the Third Circuit affirmed the dismissal with prejudice of a securities class action against Shutterfly and members of its management team. Former shareholders alleged that Shutterfly made misleading statements back in 2019 when the company included “downside” financial projections in a proxy statement used to obtain approval of a proposed merger with Apollo Management IX, L.P.

In June 2019, Shutterfly engaged Morgan Stanley to prepare a fairness opinion after Shutterfly entered into a merger agreement in which Shutterfly was acquired at $51 per share. As part of that opinion, Morgan Stanley reviewed two sets of projections created by Shutterfly management: a “base-case” scenario, and an alternative set of projections meant to “represent[] a downside view that gave greater weighting to the risk and challenges facing Shutterfly.” Subsequently, Shutterfly authorized issuing a proxy statement to its shareholders to obtain approval of the merger, which discussed Morgan Stanley’s fairness opinion, and included estimated share-value ranges based on the two sets of Shutterfly projections. The proxy statement explicitly explained that Morgan Stanley’s analysis was based on both the downside and base-case projections. Shutterfly shareholders approved the merger in August of 2019, with the merger closing the following month. 

In December 2019, lead plaintiff filed an amended complaint, alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 premised on Shutterfly’s allegedly “false and misleading disclosures” in purportedly omitting material information concerning the financial projections and Morgan Stanley’s fairness opinion. Shutterfly moved to dismiss the complaint, arguing, among other things, that plaintiff failed to identify any material misstatements in the proxy. The district court agreed, granting Shutterfly’s motion and dismissing the case with prejudice.

Plaintiffs appealed, focusing on only one allegedly misleading statement raised at the district court level: the proxy’s inclusion of share-value ranges premised on Shutterfly’s downside projections. The Third Circuit affirmed the district court’s dismissal, holding that the challenged statement “fail[ed] to establish a cause of action because it was not misleading,” and even if it was, it was not materially so. The court first reasoned that “the only statements of fact” in the proxy were that Morgan Stanley calculated the share values and how it estimated those values based, in part, on Shutterfly’s downside projection — neither of which was false or misleading. Notably, in each instance where the proxy included downside projection values, it: (1) disclosed that Morgan Stanley calculated those values; (2) described the analysis undertaken; (3) included them alongside base-case projection values; and (4) cautioned that the values should not be relied upon as an “independent assessment of Shutterfly’s actual value.” Nor, according to the court, were the downside-projection values “inherently misleading,” as the proxy accurately disclosed values grounded in the base-case projection and that Shutterfly believed these projections more likely to occur. The court also concluded that, even if the downside-share values were misleading, they were not material, because the proxy “included specific and substantive disclosures and warnings” such that no reasonable investor could conclude that the downside projections should be used to estimate Shutterfly’s actual value. 

Ninth Circuit Holds Federal Loss Causation Standard Not Met in Investor’s State Law Securities Action Against Uber

On May 19, 2021, in Irving Fireman’s Relief & Retirement Fund v. Uber Technologies, Inc. et al., No. 19-16667 (9th Cir.), a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a putative class action suit brought against Uber and its former CEO, alleging securities fraud under California Corporations Code sections 25400(d) and 25500. The panel concluded that the heightened pleading standards applicable to claims of fraud under the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act applied to Plaintiff’s state law claims brought in federal court and that Plaintiff had failed to meet those pleading requirements. 

The dispute stemmed from a series of “alleged corporate scandals” at Uber, which allegedly resulted in a 30% drop in Uber’s value. These “scandals” allegedly came to light in early 2017, when a former Uber engineer published allegations of sexual harassment at the company. Over the remainder of 2017, alone, Uber was: (1) sued for theft of trade secrets; (2) the subject of news reports exposing Uber programs which allegedly attempted to “circumvent” restrictions on Uber’s operations in certain jurisdictions and collect information on its rival, Lyft; (3) accused of violating South Korea law (prompting DOJ inquiries into Uber’s foreign dealings); and (4) the subject of additional news reports that it suffered a major data breach. On top of all this, Bloomberg reported rampant bribery allegations against Uber in Asia. Allegedly in reaction to these events, investors dramatically marked down the value of their Uber investments, resulting in an estimated decline in Uber’s value by 30%. 

Plaintiff’s operative complaint followed, alleging that Uber made false and misleading statements and omissions about the company to induce investors to purchase Uber securities. Specifically, Plaintiff alleged that Uber misled investors by “concealing material risks to their business” — allowing Uber to sell its securities at “inflated prices” — and that, when these risks “came to light,” Uber’s value plummeted. The district court dismissed the operative complaint for failure to state a claim, assuming that the heightened pleading standards under federal law applied to Plaintiff’s state law claims and holding, among other things, that Plaintiff failed to properly allege loss causation.

The Ninth Circuit panel affirmed. First, the panel disagreed with Plaintiff that it need only meet a less-rigid loss causation standard under California law — in other words, that Plaintiff’s allegations of “mere inflation” or the purchase of “overvalued” securities was enough. The panel reasoned that California law provided only “limited” guidance as to how loss causation should be applied, and that what guidance it did provide did not support Plaintiff’s contention that “mere inflation” sufficed. Second, because the panel found there to be no state law “directly addressing” the loss causation issue, it turned to the federal loss causation standard, holding that none of Plaintiff’s allegations met that standard. According to the panel, Plaintiff failed to allege how revelations of the Uber scandals actually “caused the resulting drop in Uber’s valuation” let alone “link” this drop to “any particular scandal or misstatement.” Instead, Plaintiff’s allegations simply “lump[ed] together the effects of the various alleged scandals” and did not provide the panel with the type of “assurance” that the loss-causation theory was “plausibly based in fact,” as required.

Taking Judicial Notice of SEC Cease and Desist Order, District of Maryland Denies Under Armour’s Bid to Dismiss Investor Securities Suit

On May 19, 2021, in In re: Under Armour Securities Litigation, No. 17-cv-00388 (D. Md.), Judge Richard D. Bennett, of the U.S. District Court for the District of Maryland, denied Under Armour, Inc.’s latest attempt to dismiss investor claims brought under the Securities Exchange Act of 1934 and the Securities Act of 1933. Judge Bennett held that the putative class action claims could survive because the allegations in the complaint — when coupled with the court’s judicial notice of an SEC cease-and-desist order — were sufficient at the pleading stage.

The original complaint, the first in a series of securities suits against Under Armour and its former CEO, surfaced in February 2017, with investors alleging that the company “misrepresented” customer demand for its products. After consolidation of the suit with other similar suits, the District of Maryland dismissed the consolidated amended complaint. Undeterred, in November of 2018, lead plaintiff filed a second amended complaint, again claiming violations of federal securities law premised on Under Armour’s and its CEO's allegedly “false and misleading statements” concerning “demand for Under Armour products” and the company’s financial wellbeing. The court dismissed that complaint too — for failure to adequately plead scienter — prompting plaintiffs to appeal the decision to the U.S. Court of Appeals for the Fourth Circuit. While the appeal was pending, news reports surfaced that the SEC was investigating Under Armour regarding its sales practices, prompting plaintiffs to move the district court for relief from the earlier judgment of dismissal. The court granted this request, allowing plaintiffs to file a third amended complaint.

Plaintiffs filed their third amended complaint in October of 2020, asserting violations of Sections 20A, 20(a), and 10(b) of the Securities Exchange Act of 1934. The complaint alleged that Under Armour and its CEO misled investors by falsely claiming that demand for Under Armour goods “was strong” between 2015 and 2016. Specifically, the complaint alleged that defendants “led investors to believe” that Under Armour’s “revenue growth streak” was “intact,” when actually, demand for Under Armour product was declining. It also alleged manipulation of Under Armour’s financial results “by pulling sales forward from future quarters.” Again, Under Armour and its CEO moved to dismiss the complaint, arguing that it did not “plead adequate factual details.” While the motion to dismiss was pending, the SEC issued a cease-and-desist order for, among other things, violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934, and imposed a $9 million civil penalty, all related to Under Armour’s alleged sales practices. 

In denying defendants’ motion to dismiss, Judge Bennett found that, when considering plaintiffs’ allegations alongside the SEC order, the third amended complaint could “survive.” Although noting that the SEC order was by no means “dispositive” evidence, Judge Bennet reasoned that it “lend[ed] support” to plaintiffs’ allegations by “provid[ing] specific factual allegations” regarding the Under Armour’s alleged improper sales practices, and also supported the allegations that investors were misled as to how Under Armour was “meeting or beating” its “revenue estimates.” According to Judge Bennet, this undermined defendants’ argument that the complaint did not allege “adequate details” concerning Under Armour’s pull-forward sales practices. Nor was Judge Bennet convinced that the SEC order could not speak to defendants’ scienter, an element required for plaintiffs’ Section 10(b) claims. Although not required by Sections 17(a)(2),(3) or Section 13(a) upon which the SEC order was based, the order nonetheless “include[d] specific allegations that the company and its top officials” knew about “the potential misleading nature” of Under Armour’s undisclosed sales practices. Finally, Judge Bennett found the SEC order supported plaintiffs’ allegations of falsity, pointing to the order’s allegations that “Under Armour was aware” its revenue projections “were much lower than ... predicted,” but nonetheless “continued to report its financial results without disclosing” the nature of its sales practices and “their effect on future revenue and growth.”

Morgan Mordecai