Securities Snapshot December 17, 2019

Delaware Chancery Court Orders Production of Privileged Documents in Derivative Action


Delaware Chancery Court orders production of privileged documents in derivative action; ExxonMobil defeats New York Attorney General’s claims of securities fraud in climate change trial; Northern District of Illinois denies motion to dismiss SEC’s claims for acting as unregistered dealer and broker; Third Circuit affirms former hedge fund manager’s wire fraud conviction.

On December 4, 2019, Vice Chancellor Glasscock of the Delaware Chancery Court issued a discovery ruling in In Re Oracle Corporation Derivative Litigation, a stockholder derivative action challenging Oracle’s $9.3 billion purchase of NetSuite, Inc., and required the production of both privileged and non-privileged documents relied upon by Oracle’s special litigation committee (“SLC”) in reaching certain conclusions.

The SLC had been established by Oracle to investigate and evaluate the claims in the stockholder derivative action. During its investigation, the SLC reviewed over one million company documents from dozens of custodians and interviewed 40 witnesses. After an unsuccessful attempt to mediate and settle the matter, the SLC concluded that the lead plaintiff should be permitted to proceed with the derivative litigation on behalf of Oracle.

The lead plaintiff asserted that it was entitled to all of the documents and information reviewed by the SLC. Oracle responded that the lead plaintiff could gain access to any relevant documents through traditional discovery, arguing that the lead plaintiff was not entitled to irrelevant or privileged documents. Oracle noted that, because SLC members were Oracle directors, Oracle did not “quibble” about custodians, dispute search terms, or screen the documents for relevance or privilege before producing them.

The court concluded that the lead plaintiff was entitled to at least some of the documents produced to or created by the SLC, as the SLC had determined that it was in Oracle’s best interests to allow the lead plaintiff to pursue the litigation on Oracle’s behalf. The SLC’s investigation had enhanced the value of the “litigation asset,” and “it would be, at least in part, against Oracle’s best interests to allow the lead plaintiff to proceed with the litigation asset stripped of all value created by the SLC.” The court noted, however, that allowing complete discovery in such cases “could chill candor and access and limit the effectiveness of special litigation committees going forward.” Therefore, the court concluded that the lead plaintiff was presumptively entitled to documents and communications “actually reviewed and relied upon” by the SLC or its counsel in concluding that it would be in Oracle’s best interests not to seek dismissal of the lawsuit but rather to allow the lead plaintiff (rather than the SLC) to proceed with the lawsuit on behalf of the company.

The court also ordered the production of privileged documents relied upon by the SLC, noting that the interests of Oracle, the SLC, and the lead plaintiff were more closely aligned than in other cases, and concluding that Oracle had not advanced a “single reason” why its corporate interests in non-disclosure outweighed the company’s interest in “vindication” of the litigation asset.


On December 10, 2019, in People of the State New York v. Exxon Mobil Corp., a New York state court–following 12 days of trial and testimony from 18 witnesses–found that the New York Attorney General had failed to establish by a preponderance of the evidence that ExxonMobil had committed securities fraud under New York’s Martin Act or Executive Law § 63(12) in connection with public disclosures of how ExxonMobil accounted for past, present, and future climate change risks. The trial was the first of its kind to address directly the issues of U.S. fossil fuel companies’ understanding of the manner in which climate change could have a negative impact on their businesses and the manner in which those companies present such risks to investors.

The New York Attorney General alleged (among other things) that ExxonMobil engaged in a “longstanding fraudulent scheme sanctioned at the highest levels of the company, effectively erecting a Potemkin village to create the illusion that it had fully considered the risks of climate change regulation and had factored those risks into its business operations.” The New York Attorney General further alleged that “in reality ExxonMobil knew that its representations were not supported by the facts and were contrary to its internal business practices.” In short, the New York Attorney General’s core allegation was that “ExxonMobil made misrepresentations and omissions, material to investors, during the period from late 2013 through 2016, about how ExxonMobil managed the risks of climate change and increasing regulations.”

The court concluded that the New York Attorney General failed to prove by a preponderance of the evidence that ExxonMobil made any material misstatements or omissions that misled any reasonable investor. In so doing, the court observed that the New York Attorney General “produced no testimony from any investor who claimed to have been misled by any disclosure, even though the [New York Attorney General] had previously represented it would call such individuals as trial witnesses.” In addition, the court described how ExxonMobil disclosed its use of the metrics at issue “no later than 2014,” the disclosure “was consistent with other ExxonMobil disclosures and ExxonMobil's business practices,” and its publication “had no market impact and was, as far as the evidence adduced at trial reflected, essentially ignored by the investment community.”

In sum, the court explained: “Nothing in this opinion is intended to absolve ExxonMobil from responsibility for contributing to climate change through the emission of greenhouse gases in the production of its fossil fuel products. ExxonMobil does not dispute either that its operations produce greenhouse gases or that greenhouse gases contribute to climate change. But ExxonMobil is in the business of producing energy, and this is a securities fraud case, not a climate change case. Applying the applicable legal standards, the Court finds that the [New York Attorney General] failed to prove by a preponderance of the evidence that ExxonMobil made any material misrepresentations that would have been viewed by a reasonable investor as having significantly altered the ‘total mix’ of information made available.”


On December 4, 2019, in SEC v. River North Equity LLC, et al., the Northern District of Illinois denied defendants’ partial motion to dismiss. The case involved the stock distribution of two microcap companies under the control of David Foley. Foley allegedly caused those companies to issue him over 1 billion shares of stock. He and his wife allegedly orchestrated the sale of those shares at discounted prices to River North Equity in dozens of transactions through River North’s director of business development. River North’s president and sole manager allegedly resold the stock to investors in unregistered transactions, paying some of the proceeds back to the Foleys. The SEC brought a nine-count complaint against (among others) River North and two of its executives, alleging (among other things) violations of Section 15(a) of the Securities Exchange Act of 1934 for acting as an unregistered dealer (River North) and unregistered broker (its executives). River North and its executives moved to dismiss.

River North argued that it had acted as a trader, not a dealer, so Section 15(a)’s registration requirement did not apply. The court first explained: “The ‘dealer’ definition has not been subject to extensive judicial interpretation. But courts that have construed it generally require a ‘certain regularity of participation in securities transactions.’” The court then concluded: “The SEC alleges that during the relevant period River North bought and sold over 10 billion shares of stock from more than 62 microcap issuers, and then quickly resold them to the investing public, receiving some $31 million in profit. From this, it is more than plausible that River North meets the statutory ‘dealer’ definition.” The court found “it particularly significant that according to the allegations, like an underwriter, River North: (1) purchased stocks at a discounted price directly from numerous issuers . . . (instead of purchasing stocks already in the marketplace, like a trader); and (2) turned a profit not from selling only after market prices increased (like a trader), but rather from quickly reselling at a marked-up price. This arrangement has been recognized by the SEC as characteristic of a ‘dealer.’”

One of River North’s executives argued that he was not a broker under the Exchange Act and, therefore, did not violate the Exchange Act by failing to register. The court again explained: “Like ‘dealer,’ the Exchange Act defines ‘broker’ broadly to include ‘any person engaged in the business of effecting transactions in securities for the account of others.’ And again, courts construing the definition have considered various factors,” including “regularity of participation in securities transactions at key points in the chain of distribution” and “receipt of commissions or other transaction-based compensation of particular importance.” The court found that “the allegations are sufficient to infer that [the executive] was heavily involved in the Foley transactions at key points, and received transaction-based compensation for his work.; Accordingly, it is plausible that [the executive] acted as an unregistered broker.”


On December 2, 2019, in U.S. v. Lattanzio, the Third Circuit affirmed the conviction of a former hedge fund manager, Nicholas Lattanzio, on two counts of wire fraud for using his clients’ money to cover his personal expenses. Lattanzio appealed his conviction on the grounds that the district court abused its discretion by admitting evidence of Lattanzio’s “extravagant lifestyle,” which Lattanzio contended was unduly prejudicial.

The Third Circuit disagreed with Lattanzio and affirmed the district court’s decision. The court highlighted the “substantial deference” afforded to the district court’s balancing of probative value and prejudice under Federal Rule of Evidence 403. The court noted that the government had the burden of proving that Lattanzio did not intend to honor his representations and lied about where the money had gone, and therefore evidence that Lattanzio spent the money on personal expenses was “very probative” of his intent to defraud. The court also noted that the district court weighed the potential prejudice to Lattanzio, including the possibility of juror “prejudice against wealthy people.” The Third Circuit concluded that the district court did not abuse its “considerable discretion,” and affirmed.