Securities Snapshot July 16, 2019

Second Circuit Affirms Conviction of Former MSD Capital Analyst but Remands for Recalculation of $633,028 Restitution Order to MSD


Second Circuit Affirms Insider Trading Conviction but Remands for Recalculation of Restitution to Defendant’s Former Employer; Seventh Circuit Upholds Exclusion Barring Coverage for Losses Reported to Prior Insurer; Ninth Circuit Overturns Dismissal of Putative Class Action under SLUSA; Delaware Court Court of Chancery Awards $3 million in Fees for Successful Challenge to Federal Forum Provisions in Bylaws; Largest-Ever Recovery by U.S. Department of Justice in an Opioid Case Followed by Stock Drop Suit.

On July 8, 2019, the Second Circuit Court of Appeals upheld the insider-trading conviction of a former MSD Capital LP analyst in United States v. Afriyie, but sent a $633,000 restitution order back to the district court for reconsideration in light of Lagos v. U.S., a recent U.S. Supreme Court case decided after Afriyie’s sentencing.

John Afriyie was convicted of securities and wire fraud in January 2017 and sentenced to nearly four years in prison. The government alleged that he earned $1.5 million in profits using his mother’s TD Ameritrade account to trade on inside knowledge of a planned $15 billion buyout of home security company ADT Corp. by Apollo Global Management LLC.

After the jury returned a guilty verdict, the trial court sentence included forfeiture of $2.8 million and an order that Afriyie pay $633,028 in restitution to MSD for expenses incurred as a result of the investigation and eventual trial in the case. In a parallel civil suit brought by the U.S. Securities and Exchange Commission, Afriyie was ordered to pay over $3.2 million in disgorgement and civil penalties.

On appeal, the Second Circuit affirmed Afriyie’s conviction, rejecting his arguments that the district court erred in connection with certain jury instructions, admission of certain evidence, and calculation of loss for sentencing purposes. The appellate court also rejected Afriyie’s argument that the $2.8 million forfeiture sum incorrectly included the amount of appreciation of the illicit funds acquired through the insider-trading scheme.

However, the Second Circuit ordered a limited remand to recalculate the restitution amount. Specifically, the appellate court vacated the original $633,028 restitution order after finding that, under the U.S. Supreme Court’s interpretation of the Mandatory Victims Restitution Act in Lagos, “a private firm’s legal fees related to a corporate victim’s private investigation and related civil case were not compensable as ‘necessary’ restitution.” The limited remand, for the purpose of enabling the district court to determine whether certain categories of expenses in the original restitution award were incurred during participation of the investigation or prosecution of the offense, may provide guidance to companies as to what may—or may not—be recoverable in restitution. 


On July 2, 2019, the Seventh Circuit Court of Appeals reversed an Illinois district court’s determination in Emmis Communications Corp. v. Illinois National Insurance Co. that Illinois National, an AIG unit, breached its contract with Emmis by refusing to cover Emmis’s legal fees related to a series of shareholder suits following the company’s 2010 go-private bid. The appellate court based its decision on an exclusion clause contained in Emmis’s insurance policy with Illinois National, which barred coverage for (among other things) losses in connection with claims of circumstances “as reported” under the company’s prior policy with Chubb Insurance Company.

Emmis acknowledged that it reported the claim to Chubb before it sought coverage from Illinois National, but argued that the claim should be covered because the exclusion clause pertains only to those claims that had been reported at the time the policy went into effect—an interpretation that the district court found to be reasonable. The appellate court rejected Emmis’s argument, finding that the phrase “as reported” has no discernible temporal limitations and that the timing of the report is therefore irrelevant. The decision, while brief, emphasizes the risk of loss of coverage where it is not clearly spelled out in applicable policies.


On July 5, 2019, the Ninth Circuit Court of Appeals found in Banks v. Northern Trust Corp., et al. that the Securities Litigation Uniform Standard Act of 1998 (SLUSA), which deprives a federal court of jurisdiction over certain state-law class actions, did not preclude a putative class of beneficiaries of a trust managed by Northern Trust Co. from alleging violations of state law arising from breaches of fiduciary duty. The case presented a question of first impression in the Ninth Circuit: whether, under SLUSA, “allegations concerning a trustee’s imprudent investments constitute activity ‘in connection with’ the purchase or sale of securities when those allegations are brought by the beneficiaries of an irrevocable trust.”

In December 2016, a trust beneficiary filed a putative class action in federal court based on California state-law claims. Plaintiffs alleged that Northern Trust invested trust assets into its own portfolio and prioritized its own interests over those of the trust’s beneficiaries, which led to diminished returns and inflated fees for Northern Trust. The suit further alleged that Northern Trust charged improper and excessive fees for routine tax preparation, violating California laws against elder abuse, unfair competition, and breaches of duty of prudent administration. The district court dismissed the state-law claims on the ground that the allegedly imprudent investments were “in connection with” the purchase or sale of covered securities and therefore could not be brought as a class action in federal court.

On appeal, the Ninth Circuit found the 2014 U.S. Supreme Court decision in Chadbourne & Parke LLP v. Troice instructive in its determination that SLUSA applied only where an agent guides a principal’s investment decisions. Because the trust beneficiary here could not direct or execute Northern Trust’s trades, the imprudent-investment claims did not meet SLUSA’s “in connection with” requirement and the Ninth Circuit reversed and remanded the suit back to the district court.

The Ninth Circuit’s decision on this issue of first impression limits SLUSA’s “in connection with” requirement to circumstances in which the plaintiff is induced by a third party to enter into a securities transaction. When that third party is the entity making the investment decisions, SLUSA will not apply.


On July 8, 2019, the Delaware Court of Chancery awarded $3 million in fees (the full amount sought) to an investor who successfully challenged exclusive federal forum provisions in the certificates of incorporation of Blue Apron Inc., Roku Inc., and Stitch Fix Inc. The provisions—implemented after the U.S. Supreme Court’s decision in Cyan v. Beaver County Employees Retirement Fund holding that state and federal courts have concurrent jurisdiction over claims arising under the Securities Act of 1933 (the “1933 Act”)—required that claims under the 1933 Act be filed in federal court.

An investor in all three companies, the plaintiff filed a derivative suit in December 2017 seeking a declaration that the defendants’ exclusive federal forum provisions were invalid under Delaware law. In a December 2018 decision, the Court of Chancery struck down the provisions as invalid and ineffective under Delaware law, holding that claims arising under the 1933 Act did not pertain to the “internal affairs” of the corporation. The defendants appealed this decision in January 2019, but the Delaware Supreme Court dismissed the appeal on jurisdictional grounds because the plaintiff’s fee motion was still pending before the Court of Chancery.

In the July 8 decision, the Court of Chancery determined that the $3 million in fees sought by plaintiff was “reasonable” due to the “significant and substantive” result achieved, the “legitimate contingency risk” faced by the plaintiff, and the “relatively complex” nature of the litigation, presenting a question of “first impression.” The Court ordered each of the three nominal corporate defendants to pay plaintiff $1 million. The Court noted that defendants “intend to appeal” its December 2018 decision.


On July 12, 2019, the U.S. Department of Justice (DOJ) announced a record-breaking $1.4 billion deal with global consumer goods conglomerate Reckitt Benckiser Group plc related to the company’s sales and marketing practices for the opioid addiction treatment drug Suboxone. The resolution, which represents the largest recovery by the United States in a case concerning an opioid drug, resolves potential criminal and civil liability without any admission of wrongdoing by Reckitt. It includes the forfeiture of proceeds totaling $647 million pursuant to a non-prosecution agreement, civil settlements with the federal government and various states totaling $700 million, and an administrative resolution with the Federal Trade Commission for $50 million.

The allegations in both the criminal and civil actions include claims that, among other things, Reckitt or its subsidiaries promoted under-the-tongue Suboxone to doctors while making false and misleading claims that the drug was less susceptible to patient misuse and abuse than other buprenorphine products, and less susceptible to accidental misuse by children than tablet forms of the drug. There are also allegations that the company made misrepresentations regarding the reasons for discontinuing the drug’s tablet form, and allegations that it engaged in anticompetitive practices to delay the entry of generic competition for Suboxone in order to improperly control pricing. As part of the settlement, Reckitt also entered into a separate agreement with the Federal Trade Commission that resolves allegations relating to the alleged anticompetitive activities. It also resolved multiple whistleblower lawsuits related to the same alleged sales and marketing practices.

On July 15, just days after the settlement was announced, Reckitt and several current and former executives were hit with a stock drop suit in New Jersey federal court. The complaint alleges that Reckitt, along with the individual defendants, artificially inflated the trading price of Reckitt American Depository Shares by making false and misleading statements, or material omissions, related to its Suboxone film.

Reckitt’s settlement with the federal government is an example of inter-agency coordination in the context of corporate resolutions, which the DOJ has emphasized in recent policy announcements. The stock drop suit underscores the kind of reverberations that may follow such resolutions, even when the company does not admit any wrongdoing.