Securities Snapshot August 15, 2017

Martin Shkreli Convicted Of Securities Fraud And Conspiracy

Summary

Martin Shkreli convicted of securities fraud and conspiracy; Delaware Supreme Court explains how to determine a company’s fair value under appraisal statute; Ninth Circuit rules on actionability of mixed forward- and non-forward looking statements; Eighth Circuit affirms dismissal of shareholder claim based on “puffery”; Third Circuit rules that investors’ claims are time-barred because Securities Act statute of repose cannot be tolled; Southern District of New York finds no duty to disclose the status of ongoing contractual negotiations with business partner; Southern District of New York dismisses shareholder action for failure to adequately plead scienter; U.S. government drops charges against private equity CEO after ruling suppressing evidence.

MARTIN SHKRELI CONVICTED OF SECURITIES FRAUD AND CONSPIRACY

Following a jury trial, former pharmaceutical executive Martin Shkreli was recently convicted in the Eastern District of New York on two counts of securities fraud and one count of conspiracy to commit securities fraud.  He was acquitted on five additional counts alleging conspiracy to commit securities and wire fraud.  The U.S. Attorney’s Office had alleged that Shkreli, his company’s attorney, and others had orchestrated interrelated fraudulent schemes by which they made material misrepresentations regarding fund performance and assets, in order to induce investment in Shkreli’s funds, MSMB Capital and MSMB Healthcare.  Prosecutors further alleged that Shkreli falsified performance updates after losing all investments in the funds, misappropriated assets from both funds, and misappropriated assets from Shkreli’s company, Retrophin, Inc., in order to repay MSMB investors.  In addition, they alleged Shkreli had conspired to conceal his beneficial ownership and control of Retrophin’s unrestricted or free trading shares in order to control the price and trading of the company’s stock.  Following a trial lasting over a month and nearly five days of jury deliberations, Shkreli was convicted on three counts: (1) securities fraud, for misrepresenting the performance of MSMB Capital and assets under management to induce investment in the fund, and then lying about the loss of all investments in the fund; (2) securities fraud, for misrepresenting the performance and funds under asset of MSMB Healthcare, as well as Shkreli’s prior performance with MSMB Capital and other employment, in order to induce investment in the fund; and (3) conspiracy to commit securities fraud in connection with the scheme to conceal Shkreli’s ownership and control of Retrophin’s shares.  He was acquitted on wire and securities fraud conspiracy charges underlying his security fraud convictions, as well as on conspiracy charges related to the alleged misappropriation of Retrophin assets to compensated MSMB investors.  A sentencing date has not yet been set. 

DELAWARE SUPREME COURT RULES ON HOW TO DETERMINE A COMPANY’S FAIR VALUE UNDER DELAWARE APPRAISAL STATUTE

In DFC Global Corporation v. Muirfield Value Partners, L.P., the Delaware Supreme Court recently issued its long-awaited opinion explaining how courts should determine the fair value of a company for purposes of Section 262 of the Delaware General Corporation Law (the Delaware appraisal statute).  Importantly, the court refused to find that there is a presumption that an unaffiliated buyer’s and seller’s agreed-upon price constitutes the seller’s fair value.  In DFC, the transaction at issue followed DFC’s robust market check in which, ultimately, only one potential buyer remained, and that potential buyer had no affiliation with DFC (such that its negotiations with DFC were anything other than arm’s length).  Nonetheless, the Court of Chancery held that regulatory uncertainties with respect to a potential acquisition might have caused buyers to discount the true value of DFC.  Instead, the Chancery Court valued DFC by giving equal weight to: (a) the agreed-upon merger price; (b) an analysis of comparable transactions; and (c) a discounted cash flow analysis.  Both DFC and the petitioning shareholders appealed.  In the Delaware Supreme Court, DFC argued that in cases involving arm’s-length mergers, there should be a presumption that the price of the transaction giving rise to appraisal rights is the best estimate of the seller’s fair value.  The Supreme Court rejected this argument, pointing out that the appraisal statute requires the Court of Chancery to determine the fair value of shares by taking into account “all relevant factors.”  The Supreme Court recognized that “[i]n some cases, it may be that a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort that best estimate.”  Indeed, the Supreme Court acknowledged that the collective view of market participants is often more reliable than litigation-tailored expert opinions of value.  As a result, the DFC decision did not create the bright line for determining fair value in appraisal cases that many had been seeking. 

NINTH CIRCUIT REVERSES DISMISSAL OF SECURITIES CLASS ACTION BASED ON MIXED FORWARD-LOOKING AND NON-FORWARD-LOOKING STATEMENTS

In In re Quality Systems, Inc. Securities Litigation, the Ninth Circuit reversed the dismissal of a putative securities class action lawsuit asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Quality Systems, Inc. and its officers.  The plaintiffs had alleged that defendants made false and misleading statements concerning QSI’s past and projected growth and revenue, despite the fact that defendants allegedly had real-time information showing a decline in sales due to market saturation throughout the class period.  Among other things, the complaint referenced a litany of high-ranking confidential witnesses who provided the basis for detailed allegations regarding the defendants’ alleged real-time knowledge of market saturation and the company’s failure to meet sales goals.  Moreover, one of the individual defendants sold nearly 90% of his holdings in the company during the class period, with the proceeds totaling more than seven times his annual salary.  As a result, the Ninth Circuit found that the plaintiffs had adequately pled scienter.  Furthermore, the Ninth Circuit disagreed with the district court’s assessment that the allegedly false or misleading statements were forward-looking and therefore protected under the PSLRA’s safe harbor provision.  Instead, the Ninth Circuit concluded that “some of Defendants’ statements were ‘mixed statements,’ containing non-forward-looking statements as well as forward-looking statements of projected revenue and earnings.”  According to the court, “a defendant may not transform non-forward-looking statements into forward-looking statements that are protected by the safe harbor provisions of the PSLRA by combining non-forward-looking statements about past or current facts with forward-looking statements about projected revenues and earnings.”  Joining the First, Second, Third, Fifth, and Seventh Circuits, the Ninth Circuit therefore held that “where defendants make mixed statements containing non-forward-looking statements as well as forward-looking statements, the non-forward-looking statements are not protected by the safe harbor of the PSLRA.”  The court went on to find that the non-forward-looking statements were materially false or misleading, and that certain forward-looking statements did not include adequate cautionary language and were made with actual knowledge of their falsity.

EIGHTH CIRCUIT AFFIRMS DISMISSAL OF A SECURITIES CLASS ACTION LAWSUIT BASED ON NON-ACTIONABLE “PUFFERY”

In In re Stratasys Ltd. Shareholder Litigation., the Eighth Circuit recently affirmed the dismissal of a securities class action lawsuit asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Stratasys Ltd., a 3-D printer manufacturer, and its officers.  Stratasys allegedly made statements that its 3-D printers offered “unmatched speed, reliability, quality and connectivity.”  The plaintiffs alleged that contrary to these representations, the manufacturer concealed significant design and manufacturing problems with its fifth-generation printers that it released in 2014, which essentially rendered the printers inoperable.  The Eighth Circuit found Stratasys’s statements regarding its printers to be “vague and nonverifiable,” and thus not actionable puffery: “[t]he statements the shareholders here claim are materially misleading are so vague and such obvious hyperbole that no reasonable investor would rely upon them.”  The court also concluded that the plaintiffs failed adequately to plead scienter, because they did not provide enough detail about when Stratasys knew about the 5G printer issues or their resulting financial impact.  The court stated:  “Without tying the timing of the knowledge to the allegedly misleading statements, the shareholders do not plead facts sufficient to support a strong inference of scienter.”

THIRD CIRCUIT FINDS THAT INVESTORS’ CLAIMS WERE TIME-BARRED

In North Sound Capital LLC v. Merck & Co. Inc., the Third Circuit found that investors’ claims under the Securities Exchange Act of 1934 that Merck had misrepresented results of a clinical trial for its anti-cholesterol drug Vytorin were time-barred.  The plaintiffs (various unrelated investment funds) alleged that Merck (in its own capacity and as successor to Schering-Plough Pharmaceuticals) failed to inform the market of the results of a four-year Vytorin clinical trial, which ultimately failed to show that Vytorin could treat cholesterol or prevent heart disease.  In 2008, two years after the clinical trial ended, the results became public, and Merck’s stock price dropped significantly.  All the funds were initially class members in separate suits filed against Merck and Schering-Plough in 2008 that claimed the companies concealed material information and made false statements regarding Vytorin that artificially inflated the value of Schering-Plough securities from January 3, 2007, to March 28, 2008.  The plaintiff funds timely opted out of the class action settlements on March 1, 2013 and asserted their own individual claims in November 2013 and January 2014.  Merck contended that the plaintiffs’ suits were outside the applicable repose period for bringing an action under the Exchange Act, but the district court held that the applicable statutes of repose were tolled until the plaintiffs opted out of class action settlements.  The Third Circuit reversed, relying on the Supreme Court’s recent decision in CalPERS v. ANZ Securities, which “clarified” the law and established that equitable tolling does not apply to the statute of repose under federal securities laws.  Because equitable tolling did not apply to Plaintiff’s claims, the Third Circuit reversed the district court’s decision, and found the plaintiffs’ claims were untimely to the extent such claims were brought after the applicable statutes of repose had lapsed. 

SDNY DISMISSES A SHAREHOLDER LAWSUIT, FINDING NO DUTY TO DISCLOSE  STATUS OF ONGOING CONTRACT NEGOTIATIONS WHERE OUTCOME IS UNCERTAIN

In In re Express Scripts Holding Co. Securities Litigation, the U.S. District Court for the Southern District of New York recently dismissed a shareholder lawsuit asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for failure to adequately to plead that the company made false or misleading statements about its relationship with a business partner.  Express Scripts had contracted with Anthem Inc. to serve as the exclusive pharmacy benefits management servicer for all Anthem-administered health insurance plans through 2019.  In early 2015, Anthem accused Express Scripts of breaching the contract, but continued to engage in ongoing negotiations regarding pricing.  In 2015, Express Scripts made public statements that its relationship with Anthem was strong, and that pricing negotiations with Anthem were ongoing.  However, in December 2015, Express Scripts disclosed that the ultimate outcome of the negotiations was uncertain, and Anthem ultimately sued Express Scripts in March 2016.  The plaintiffs alleged that Express Scripts had a duty to disclose the status of the acrimonious pricing negotiations throughout 2015, given that: (a) Express Scripts had spoken about its “strong” relationship with Anthem and the “active” negotiations, and (b) Anthem accounted for approximately 17% of Express Scripts’ revenues and was Express Scripts’ largest customer.  Judge Edgardo Ramos disagreed, reasoning that there is no duty to disclose the status of ongoing negotiations where the outcome is uncertain, which was particularly true in this case where Express Scripts had disclosed in December 2015 that the outcome of negotiations was uncertain, and as recently as January 2016, even Anthem had disclosed that it was “hopeful” about the ongoing contract negotiations.  The court concluded:  “Even though Express Scripts and Anthem did enter into litigation in March 2016, plaintiff alleges no facts that triggered a duty to disclose before December 2015.”  As a result, the court dismissed the complaint.

SDNY DISMISSES SHAREHOLDER CLAIM FOR FAILURE TO ADEQUATELY PLEAD SCIENTER

In Pirnik v. Fiat Chrysler Automobiles NV, the U.S. District Court for the Southern District of New York dismissed claims arising out of plaintiffs’ claims related to allegedly false statements regarding compliance with emissions standards.  In 2014, Fiat Chrysler had made general statements concerning Fiat’s compliance with emissions regulations for diesel vehicles, and in early 2016 Fiat Chrysler affirmatively denied that it used “defeat devices” that limited emissions for only a short period of time. Later in 2016, however, Germany’s federal motor transportation reported that its testing suggested that some of Fiat’s vehicles did use such devices.  In January 2017, the EPA and California Air Resources Board (CARB) concluded that Fiat had installed and failed to disclose that certain of its vehicles used software to enable the vehicles to produce excess emissions.  Plaintiffs sued, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  The court dismissed the emissions-related claims, holding that plaintiffs’ allegations did not establish a strong inference of scienter. In particular, Judge Jesse M. Furman found that the plaintiffs had failed to allege that any of the defendants sold Fiat stock during the putative class period.  In concluding that the allegations failed to show that defendants acted with actual intent or conscious recklessness, the court summarized the allegations as instead showing that diesel engines were important to the company, that certain officers received “regular reports regarding emissions tests and that the company had audited its vehicles for emissions compliance,” and that other automakers were being scrutinized by regulators.  “Conspicuously absent, however, are any allegations that [Fiat-Chrysler officials] ever received test results, reports, or other communications indicating that [Fiat-Chrysler] vehicles were not in compliance with relevant emissions regulations prior to the EPA’s and CARB’s notices on January 12, 2017. That dooms Plaintiffs’ case for scienter here.”

GOVERNMENT DROPS SECURITIES FRAUD AND MONEY LAUNDERING CHARGES FOLLOWING RULING ON MOTION TO SUPPRESS

Last month, we reported on the case of private equity CEO Benjamin Wey, who had been charged with criminal securities fraud and money laundering.  The U.S. District Court for the Southern District of New York granted Wey’s motion to suppress evidence seized during FBI searches of his home and office, finding that the FBI agents who conducted the searches had disregarded constitutional principles and suppressing all of the evidence seized. Consequently, on August 8, 2017, the government filed a nolle prosequi dismissing all charges against Wey.  In the filing, the government stating that they had “sought charges in this matter based in significant part on materials seized during those searches.” Therefore, “[b]ecause the government can no longer rely on that evidence at trial . . . the government has decided to dismiss the charges pending against Wey.”