On July 30, 2018, in Hampton v. Root9B Technologies, Inc., the Tenth Circuit Court of Appeals affirmed the U.S. District Court for the District of Colorado’s dismissal of a securities fraud class action against Root9B, a provider of cybersecurity products and services, and certain of its officers. The plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The district court had dismissed those claims, holding that the plaintiff had failed to sufficiently plead that the alleged misstatements were false or misleading. On appeal, the plaintiff argued that the defendant company’s CEO made false and misleading statements in a letter to investors, via language that was repeated in SEC filings, attesting that the company was differentiated from competitors by its “proprietary hardware and software,” and that the company had successfully thwarted a cyber-attack. The plaintiff had based his claims on various internet articles about the company. The Tenth Circuit concluded that the articles did not specifically address the statements that the plaintiff had alleged to be false or misleading, and, at most, simply stated the possibilityof a false statement. The court concluded that such speculative possibilities were insufficient to meet the heightened pleading standard applicable to allegations and falsity and scienter under the Private Securities Litigation Reform Act of 1995. This case helps show that mere rumors and speculation in news articles or blog posts—standing alone—are insufficient to sustain a securities fraud claim.
NINTH CIRCUIT VACATES FRAUD CONVICTION ON DUTY-TO-DISCLOSE JURY INSTRUCTION
On July 30, 2018, in United States v. Spanier, the Ninth Circuit Court of Appeals overturned a conviction in the U.S. District Court for the Southern District of California linked to an alleged $100 million stock-based loan fraud. Among many other arguments, the defendant argued on appeal that because the government’s fraud case involved both affirmative misrepresentations and omissions, he was entitled to a jury instruction that non-disclosure can only support a charge of fraud if the defendant has a duty to disclose the omitted information. The Ninth Circuit agreed, and rejected a law-of-the-case argument by the government based on a previous appeal, concluding that controlling authority required a reexamination of the jury instructions. The Ninth Circuit also concluded that the legal error was not harmless beyond a reasonable doubt, noting that, in his initial trial, the defendant had received his requested instruction, and the jury had hung on the counts that were re-tried before the district court. Only in the subsequent trial, where the instruction was not given, was the defendant convicted on those counts. The court then vacated the defendant’s conviction and remanded for a new trial. The Ninth Circuit rejected the defendant’s other arguments raised on appeal, including issues raised concerning several conspiracy instructions.
SECOND CIRCUIT AFFIRMS DISMISSAL OF “BEST EXECUTION” STATE LAW CLAIMS UNDER SLUSA
On July 31, 2018, the Second Circuit Court of Appeals upheld the dismissal of a proposed class action in Rayner v. E*Trade Financial Corp. The plaintiff raised state law claims accusing E*Trade Financial of unlawfully steering certain trades to banks and exchanges that made relatively high payments to the company, instead of fulfilling its obligations of “best execution.” The U.S. District Court for the Southern District of New York had previously dismissed the suit, concluding that the state law claims were barred by the Securities Litigation Uniform Standards Act of 1998. SLUSA prohibits state law class action claims otherwise covered by federal securities laws against material misrepresentations or omissions. On appeal, the Second Circuit agreed with the district court that SLUSA barred the claims. The Second Circuit rejected the plaintiff’s attempt to artfully plead around SLUSA, ruling that despite the plaintiff’s contention that he brought a claim grounded in a “non-fraud based fiduciary duty,” the substance of his claims were based on a theory that E*Trade Financial misrepresented the way it conducted trades. In reaching this conclusion, the Second Circuit reached the same result that several other courts have recently reached, including the Seventh, Eighth, and Ninth Circuit Courts of Appeals.
NINTH CIRCUIT AFFIRMS DISMISSAL OF INSUFFICIENTLY PLEADED “DARK POOL” TRADING CLAIMS
On July 30, 2018, the Ninth Circuit Court of Appeals in Great Pacific Securities v. Barclays Capital, Inc., affirmed a decision of the U.S. District Court for the Central District of California dismissing a complaint against Barclays Capital for alleged misrepresentations concerning a “dark pool” trade system run by Barclays. The Ninth Circuit agreed with the district court that Great Pacific Securities had failed to plead the alleged fraud with particularity under Federal Rule of Civil Procedure 9(b), specifically failing to plead reliance. In its complaint, Great Pacific Securities had pleaded that certain marketing materials put out by Barclays touted its alternative trading system’s ability to thwart high frequency traders. But regardless of whether marketing materials contained those representations, according to the Ninth Circuit, the operative complaint did not even include allegations that Great Pacific Securities received the alleged misrepresentations, let alone relied on them. This failure also doomed Great Pacific Securities’ similar claims under California’s consumer protection statutes.
DELAWARE COURT OF CHANCERY REJECTS APPRAISAL DCF ANALYSIS IN FAVOR OF DEAL PRICE
On July 30, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery decided In re Appraisal of Solera Holdings, Inc., an appraisal action following Solera’s acquisition by Vista Equity Partners for $55.85 per share, for a deal price of approximately $3.85 billion. The case marks another important ruling following the Delaware Supreme Court’s decisions in DFC Global Corporation v. Muirfield Value Partners, L.P. and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. in 2017, which focused heavily on the deal price as indicia of value. In Solera, the petitioning shareholders contended that the company was properly valued at $84.65 per share, over 50% above the deal price. The petitioners’ value was entirely based on a discounted cash flow (DCF) analysis. The company’s expert concluded that the deal price, less $1.90 per share for synergies, was the appropriate value, or $53.95 per share. While the company expert’s DCF analysis came to only $53.15 per share, he believed it was less reliable than the deal price. Though the company’s strategy had been focused on the deal price, it changed course following another Court of Chancery decision, Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., in which that court found that the much lower market price was the appropriate value. Chancellor Bouchard rejected the company’s switch, and found that the deal price should be given dispositive weight, noting a robust deal process, despite a few irregularities, and a special committee that “demonstrate[d] a real willingness to reject inadequate bids.” In the wake of DFC and Dell, and with confidence in the deal process, Chancellor Bouchard found the petitioners’ DCF “facially unbelievable.” The court also rejected an invitation by the petitioners to increase the price based on merger costs, noting that those costs were part and parcel of an arm’s-length transaction. Chancellor Bouchard then concluded that the company’s evidence of synergies, despite the buyout coming from a financial sponsor, was convincing, and deducted $1.90 per share from the transaction price, for a final valuation of $53.95 per share, below the deal price. This decision will have important ramifications as shareholders consider the viability of an appraisal action, or seeking valuations far above deal price.