Securities Snapshot
August 10, 2022

SEC Focuses on Insider Trading and Leverages Market Analytics in Recent Slew of Enforcement Cases

SEC Focuses on Insider Trading and Leverages Market Analytics in Recent Slew of Enforcement Cases; Apple Ordered to Produce Internal Communications Concerning Investor Disclosure, Despite Involvement of Counsel and Timely Privilege Objections; Delaware Court of Chancery Dismisses Trade Desk Stockholder Suit Over Governance Change Prolonging Voting Control Of CEO and Co-Founder

On July 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) announced insider trading charges against ten individual defendants across four separate cases (Bhardwaj, Goel, Markin, and Buyer), filed in the U.S. District Court for the Southern District of New York. These charges demonstrate the SEC’s increased focus on insider trading. The U.S. Attorney’s Office for the Southern District of New York also announced parallel criminal charges in each of the four cases (Bhardwaj, Goel, Markin, and Buyer).

All four cases identified individuals who traded on tipped or misappropriated material non-public information about then-unannounced acquisitions. In Bhardwaj and Goel, the information was obtained as a result of the tipper’s employment. In Markin, the tipper misappropriated the information about an unannounced tender offer by covertly reviewing deal documents from his then-romantic partner, who worked as an associate for a law firm representing the acquiring company. And in Buyer, the tipper (a retired U.S. Representative for Indiana’s 4th District), learned about a non-public acquisition plan while on a golf outing with an executive at the acquiring company.

In three of the four cases — Bhardwaj, Goel, and Markin — the SEC attributed the discovery of the illicit trades to data analytics performed by the Analysis and Detection Center of the Division of Enforcement’s Market Abuse Unit, which uses data analytics to detect and monitor suspicious trading activity. The parallel criminal cases are also built on evidence from the Analysis and Detection Center. In the press release announcing the data analytics cases, Director of the SEC’s Division of Enforcement Gurbir Grewal stated that the “actions show we stand ready to leverage all of our expertise and tools to root out misconduct and to hold bad actors accountable no matter the industry or profession.”

Apple Ordered to Produce Internal Communications Concerning Investor Disclosure, Despite Involvement of Counsel and Timely Privilege Objections

On July 29, 2022, Magistrate Judge Joseph C. Spero of the U.S. District Court for the Northern District of California ordered Apple, Inc. to produce internal communications with counsel related to a public investor disclosure, a clear reminder that even the direct involvement of counsel will not bring the protection of the attorney-client privilege over communications that fundamentally serve a “business purpose.”

The discovery dispute arose in an ongoing investor class action challenging Apple’s public disclosure of market demand for iPhones in 2018 and 2019. Plaintiffs sought to compel the production of documents related to Apple CEO Tim Cook’s 2019 “Letter to Investors,” including internal communications with counsel about the letter’s disclosure of a multi-billion revenue shortfall. Apple withheld from discovery the communications that included counsel on the basis of attorney-client privilege.

Rejecting Apple’s claims of attorney-client privilege, Judge Spero held that email exchanges in which in-house counsel were merely copied without providing legal advice (or, indeed, even comments) are not privileged. Judge Spero reasoned that many of the emails were clearly exchanged for a business purpose, rather than a legal one, including emails that addressed the issuer’s financial performance. The court also rejected Apple’s request to file additional briefing to further substantiate privilege claims over a subset of communications with the company’s disclosure committee, again on the basis that a standing disclosure committee serves a business function distinct from the legal advice rendered by counsel.

By contrast, Judge Spero upheld Apple’s assertion of privilege over communications in which counsel explicitly provided legal advice, including substantive advice on internal drafts of the Letter to Investors.

Delaware Court of Chancery Dismisses Trade Desk Stockholder Suit Over Governance Change Prolonging Voting Control of CEO and Co-Founder

On July 29, 2022, Delaware Court of Chancery Vice Chancellor Paul A. Fioravanti dismissed claims brought by stockholders against The Trade Desk, Inc. (“TTD”), that challenged an amendment to a dilution trigger provision in TTD’s certificate of incorporation. In his ruling, the vice chancellor found that the board’s approval of the amendment was subject to business judgment review and did not breach duties to TTD’s stockholders, even though the amendment allowed CEO and co-founder Jeffrey Green to retain control he otherwise would have lost. The case highlights the effective use of a special committee to escape entire fairness review of a board decision and is a prime example of the proper dismissal of a complaint that simply second-guesses the wisdom of the deal approved by the board.

This case stems from a lawsuit brought by TTD stockholders in June 2021 against Green and other TTD officers and directors, and concerns provisions in TDD’s certificate of incorporation that would sunset TDD’s dual class stock structure. Under this structure, TDD’s Class A stock trades publicly on the NASDAQ and entitles holders to one vote per share, while Class B stock is not publicly traded and entitles holders to ten votes per share. A “dilution trigger” in the certificate of incorporation would automatically convert all Class B stock to Class A stock on a 1-for-1 basis if the number of outstanding Class B shares fell below 10% of the total outstanding Class A and Class B shares.

Green owned 98% of the Class B stock, which had dwindled to 11.2% of the total outstanding shares by May 2020. Plaintiff alleged that Green wanted to sell shares but not lose his voting control, and so acted to preserve his control by instructing other Class B holders not to sell and then directing the amendment of the certificate of incorporation that eliminated the dilution provision. In June 2020, the board formed a special committee to evaluate whether to eliminate the dilution trigger. After several meetings, the special committee approved the amendment. The board then approved the amendment, and brought it to a stockholder vote, where it was approved by 52% of the unaffiliated shares.

Plaintiff alleged that the transaction should be subject to the rigorous “entire fairness” review because the transaction involved Green, a controlling shareholder. Defendants moved to dismiss on the basis that it was entitled to, and met the standard for the more lenient business judgment standard. Specifically, TTD asserted that the transaction complied with the framework set forth in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), which states that an otherwise interested transaction is nonetheless subject to business judgment rule where the transaction (1) is conditioned on the approval of both a special committee and a majority of minority stockholders, (2) the special committee is independent and empowered to freely select advisors and reject the transaction, (3) the special committee meets its duty of care in negotiating a fair price, (4) the vote of the minority is informed, and (5) there is no coercion of the minority.

Vice Chancellor Fioravanti rejected the plaintiff’s assertion that the transaction deserved higher scrutiny, finding that plaintiff failed to allege sufficient facts to support their allegations that the special committee lacked independence from Green. He also held that the information omitted from TTD’s disclosures leading up to the stockholder vote — i.e., that dilution was imminent absent the amendment — was not materially misleading or incomplete, namely because the precise dilution trigger date was unknowable. Therefore, TTD’s disclosure that it could be triggered “as early as” March 2021 was appropriate. The vice chancellor dismissed the complaint, reasoning that, rather than allege that the special committee had a deficient process, the plaintiff relied on their belief that the dilution trigger amendment “was a bad deal” for stockholders and “second guess[ed]” the result of the transaction.

Lawyers in Goodwin’s Securities and Shareholder Litigation and White Collar Defense practices have extensive experience before U.S. federal and state courts, legislative bodies and regulatory and enforcement agencies. We continually monitor notable developments in these venues to prepare the Securities Snapshot — a bi-weekly compilation of securities litigation news delivered to subscribers via email. This publication summarizes news from the civil and criminal securities law arenas in a succinct, digestible format. Topics covered include litigation and enforcement matters, legislation, rulemaking, and interpretive guidance from regulatory agencies.

Editorial Board
Jennifer Burns Luz
Jonathan Shapiro
Meghan K. Spillane

Contributing Authors

Zoe Bellars
Catherine Tremble
Dorothy Hazan