On December 18, 2020, in John Lindstrom v. TD Ameritrade, Inc. and TD Ameritrade Futures & Forex, LLC d/b/a Thinkorswim, the U.S. District Court for the Northern District of Illinois held that the COVID-19 pandemic was to blame for oil futures prices dropping into the negative in April, dismissing claims that the defendants were responsible for traders’ losses at the height of the pandemic.
Lead plaintiffs John Lindstrom and Wei owned crude oil futures positions through an account with TD Ameritrade Futures & Forex (TDAFF). On April 20, 2020, at the height of the COVID-19 pandemic, crude oil future contracts went into negative territory. Once that occurred, TDAFF’s system was unable to accept buy or sell orders because it did not recognize negatively priced crude oil orders. In the futures market, account holders must maintain cash deposits, i.e., “margin,” with the futures broker. When the margin drops below the requirements for an account, a broker issues a “margin call,” requiring the investor to restore equity in the account. If a margin call is not met within a specified period, an investor’s position may be liquidated. Here, TDAFF liquidated plaintiffs’ positions while they were valued below zero, resulting in a total loss of $66,390 on three crude oil contracts. Plaintiffs thereafter brought suit against TD Ameritrade, Inc. and TDAFF, alleging violations of the Commodity Exchange Act (“CEA”) and associated regulations, breach of the implied covenant of good faith and fair dealing, negligence, and breach of contract.
With regard to their CEA claim, plaintiffs alleged that defendants committed three material omissions in connection with the decline in crude oil prices. The first was TDAFF’s failure to “notify/advise their customers of material information regarding the crude oil markets,” specifically that prices had the potential to go to zero. The second was TDAFF’s failure to liquidate plaintiffs’ contracts at a commercially reasonable time, i.e., at or before the time they fell into the negative. The third alleged omission, which the court deemed to be plaintiffs’ best allegation “considering that TDAFF was aware that prices were likely to go negative and allegedly took no action to prepare its systems for that eventuality,” was TDAFF’s failure to enable protocols on its platform that would permit investors to place negatively priced trades.
The court, however, found that plaintiffs failed to identify any duty that TDAFF owed to inform customers of market trends and failed to “identify any principle that would support imposing liability on TDAFF for exercising its right to liquidate securities held in under-margined accounts.” The court further found that plaintiffs lacked standing to claim that TDAFF failed to inform its customers that they could not place negatively priced trades because they failed to allege that they ever tried to place such a trade. “Given that TDAFF had a motive to avoid a situation in which its customers could not satisfy a large margin call,” the court similarly found plaintiffs’ scienter allegations to be insufficient. Specifically, the court found it would not be reasonable to infer that TDAFF made any of the alleged omissions with an intent to deceive or defraud since TDAFF had an obvious motive to inform its customers of the market conditions: if an account became so under-margined that the customer no longer had the means to meet a margin call, TDAFF might have become liable for covering the loss.
The court granted defendants’ motion to dismiss without prejudice, concluding that “[p]laintiffs, like many investors in the first half of 2020, lost a great deal of money. COVID-19 is responsible for those losses. Plaintiffs fail to plausibly connect TDA and TDAFF to those losses.”
Scotus Grants Certiorari In Goldman Sachs Class Certification Fight
On December 11, 2020, in Goldman Sachs Grp., Inc. et al., v. Arkansas Teacher Ret. Sys., et al., the United States Supreme Court granted certiorari to review Goldman Sachs’ (“Goldman”) challenge to certification of an investor class, in a case Goldman described as the “most important securities case to come before the Court since Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014).”
The case arises out of an SEC action against Goldman for its issuance of certain collateralized debt obligations (CDOs) prior to the subprime mortgage crisis. After the SEC commenced an enforcement action, Goldman’s stock dropped 13% and investors brought suit. Plaintiffs alleged Goldman violated Section 10(b) and 10b-5(b) by making generic statements in SEC filings that artificially inflated Goldman’s stock price, resulting in losses after the SEC revealed alleged client conflicts in certain CDOs Goldman structured and sold before the financial crisis.
To obtain class certification in a private action under Section 10(b) and Rule 10b-5(b), plaintiffs must satisfy the requirements of Fed. R. Civ. P. 23. For a class seeking to recover damages, plaintiffs must show that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3). Plaintiffs asserting Section 10(b) claims would ordinarily not be able to satisfy the predominance requirement, because the element of reliance would require an individual inquiry into the investment decisions of each potential class member. But in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court made it easier for plaintiffs to satisfy the predominance requirement by creating a “rebuttable presumption” of classwide reliance.
The U.S. District Court for the Southern District of New York certified the class, concluding that Goldman had failed to rebut the Basic presumption. The Second Circuit Court of Appeals vacated, determining that the district court had not properly applied the preponderance-of-the-evidence standard and further holding that a defendant seeking to rebut the Basic presumption bears the ultimate burden of persuasion.
On remand, the district court again certified the class, and again concluded that Goldman had failed to rebut the Basic presumption. A divided Second Circuit panel affirmed, rejecting Goldman’s effort to rebut the presumption by pointing to the generic and aspirational nature of the alleged misstatements in showing that the statements had no impact on its stock prices.
Goldman petitioned for certiorari, asking the court to address two questions: first, whether a defendant may rebut the Basic presumption by pointing to the generic nature of the alleged misstatements, even though that evidence is also relevant to the substantive element of materiality; and, second, whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion. The case presents significant questions concerning the presumption of classwide reliance first recognized in Basic. The Basic presumption, born out of a 1988 Supreme Court decision, allows a court to presume classwide reliance on a defendant’s alleged misrepresentation if the plaintiff establishes certain prerequisites. The questions presented seek guidance on how materiality and reliance — two elements of a securities fraud claim — intersect, and the extent to which defendants can challenge those elements at the class certification stage.
In its certiorari petition, Goldman argues that “[i]f the decision below is allowed to stand ... the challenged holdings will guarantee plaintiffs the ability to obtain certification in virtually any securities class action premised on the increasingly popular and plaintiff-friendly ‘inflation maintenance’ theory.” Under that theory — which the Supreme Court has not yet recognized — a misstatement can have price impact not only by artificially inflating a stock’s price at the time it was made, but also by preventing the stock price from decreasing. On the face of that theory, Goldman argues, a defendant cannot rebut the Basic presumption by showing that an alleged misstatement did not increase the stock price at the time it was made, as the defendant could in a traditional securities class action. Rather, the defendant can rebut the presumption only by showing that the “correction” of the alleged inflation-maintenance misstatement did not cause a subsequent drop in the stock.
By granting certiorari, the Supreme Court has signaled its willingness to address the scope and application of the Basic presumption of classwide reliance, a decision that could have widespread implications for defendants in securities class actions.
Securities Fraud Suit Against Twitter Dismissed With Leave To Amend
On December 10, 2020, in In re Twitter, Inc. Securities Litigation, the U.S. District Court for the Northern District of California dismissed a consolidated securities class action litigation against Twitter, Inc. (“Twitter”) and its chief executive officer and chief financial officer. Defendants had moved to dismiss on the grounds that plaintiffs failed to (1) allege statements that were materially false or misleading, or otherwise actionable, (2) establish a strong inference of scienter, and (3) establish loss causation.
The dispute stems from Twitter’s advertising product, Mobile Application Promotion (“MAP”), which prompts users to install an advertiser’s mobile application on their devices, or re-engage with a mobile application that the user has already downloaded. MAP’s ability to generate advertising revenue relies heavily on sharing user data with advertisers (although Twitter allows users to opt-out of the data sharing program) as well as receiving targeted advertising. According to the declaration of one of Twitter’s sales finance managers, the MAP product was a primary source of expected revenue growth for Twitter in 2015.
On July 26, 2019, Twitter disclosed its financial results for Q2 2019 in a letter to shareholders. In this letter, defendants represented that improvements in MAP’s stability, performance, and scale were ongoing and would have a positive impact on revenue. These representations were repeated in Twitter’s Q2 2019 Form 10-Q, which also stated: “Our products and services may contain undetected software errors, which could harm our business and operating results.” On August 6, 2019, Twitter announced to its users that it had “recently discovered and fixed issues related to  setting choices for the way personalized ads” are delivered and when certain data is shared with “trusted measurement and advertising partners.” Twitter stated it had fixed these issues on August 5, 2019.
One month later, at a September 4, 2019 conference, defendants represented that Twitter’s work on MAP was ongoing, that Twitter had made improvements to MAP, and that it continued to sell MAP. Defendants further stated that Asia tended to be “more MAP-focused historically.”
On October 24, 2019, before the markets opened, defendants held an investor call regarding Twitter’s Q3 2019 financial results. During the call, defendants disclosed that they had implemented certain changes to address privacy violations, i.e., turning off user data sharing, that had negatively affected Q3 revenue growth by “3 or more points,” and that these negative effects would continue through at least Q4 2019 by “4 or more points.” Defendants further disclosed a 1% decline in Japanese revenue due to a drop in MAP related to bugs. That same day, Twitter’s shares declined $8.10 per share to close at $30.73 per share.
Plaintiffs alleged the defendants made various fraudulent statements or omissions regarding MAP, including (1) Twitter’s July 2019 statements about MAP progress and revenue prediction, (2) its August 2019 announcement about software bugs affecting MAP, and (3) the company’s September 2019 statements about MAP’s progress and Asia’s historical focus on MAP.
The district court found that Twitter’s statements and revenue projections were not misleading and thus not actionable because they could be understood by reasonable investors as puffery and fell within PSLRA’s safe harbor provision: “the fact that MAP may have been experiencing glitches does not demonstrate how the defendants’ generalized statement of projected MAP revenue was false or misleading .... [I]t is entirely possible that Twitter was making progress towards improving its MAP product and would generate revenue therefrom at some point.” While noting it was “not apparent that plaintiffs can amend,” the court, “out of abundance of caution,” provided plaintiffs leave to amend in granting the motion to dismiss.
Delaware Supreme Court Rejects Two Common Defenses Companies Use To Oppose Producing Corporate Records Under Section 220
On December 10, 2020, the Delaware Supreme Court removed two common defenses companies often use to oppose the production of corporate records to stockholders pursuant to Section 220 of the Delaware General Corporation Law, which gives stockholders the right to inspect a corporation’s books and records when the inspection demand (1) comes from existing stockholders, (2) satisfies the statutory form and manner for presenting a demand, and (3) states a proper purpose reasonably related to the person’s interest as a stockholder.
In AmerisourceBergen Corp. v. Lebanon Cnty. Emps’ Ret. Fund and Teamsters Local 443 Health Svcs. & Ins. Plan, the Delaware Supreme Court heard an interlocutory appeal from a Delaware Court of Chancery opinion ordering defendant AmerisourceBergen Corporation (“AmerisourceBergen”) to produce thirteen categories of books and records to Lebanon County Employees Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan, and granting the plaintiffs leave to take a Rule 30(b)(6) deposition “to explore what types of books and records exist and who has them.”
AmerisourceBergen claimed that the plaintiffs’ demand — aimed at investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing — was fatally deficient because it failed to disclose the plaintiffs’ ultimate objective, i.e., what they planned to do with the books and records in the event that their suspicions of wrongdoing were confirmed. AmerisourceBergen further argued that the lower court erred in holding that the plaintiffs were not required to establish a credible basis to suspect actionable wrongdoing, and in allowing plaintiffs to take a post-trial Rule 30(b)(6) deposition.
The Supreme Court disagreed with each argument. First, the court held that, when a Section 220 demand states a proper investigatory purpose, “it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing.” Second, the court held that, “although the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose,” a stockholder is not required “in all cases” to establish that the wrongdoing is actionable. Finally, the court found that the Court of Chancery did not abuse its discretion in allowing a post-trial 30(b)(6) deposition.
Although the court agreed with the Court of Chancery’s determination that the plaintiffs’ “contemplated purpose other than litigation [was] supported by a fair reading of the Demand,” it took the “opportunity to dispel the notion that a stockholder who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement must demonstrate that the wrongdoing or mismanagement is actionable.” The court emphasized that a stockholder is not required to “prove that wrongdoing occurred,” only that there “is ‘possible mismanagement that would warrant further investigation.’” Two important aspects of the ruling are:
(1) stockholders making Section 220 demands need not demonstrate that the wrongdoing being investigated is actionable; and
(2) when the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to specify the ends to which it might use the corporate records requested.
The interlocutory appeal has been remanded for further proceedings.
David R. Callaway