Securities Snapshot March 23, 2021

Federal Judge Dismisses Facebook Investor Class Action Based on Board Diversity

In This Issue
Federal Judge Dismisses Facebook Investor Class Action Based on Board Diversity, Virginia Federal Judge Denies Motion to Dismiss Claims that Altria Knew JUUL Was Marketing to Underage Consumers, SEC Brings Claims Against AT&T for Violating Regulation Fair Disclosure by Selectively Providing Information to Securities Analysts, Ninth Circuit Reverses Dismissal Under SLUSA of Class Action Fiduciary Duty Claims under State Law.
In This Issue
In This Issue
In This Issue
On March 22, 2021, a California federal magistrate judge granted Facebook’s motion to dismiss a shareholder class action arising out of an alleged lack of diversity on Facebook Inc.’s Board and other alleged discriminatory practices.  As we previously reported, there has been a lot of recent attention on board diversity, including a number of lawsuits (mainly against technology companies headquartered in California) in an effort to push board diversity and penalize companies that shareholders contend have made misleading statements about actions taken to reach their stated diversity and inclusion objectives.  In particular, the shareholder lawsuit filed in July 2020 against Facebook alleged that the company failed to achieve real diversity on its Board and failed to curtail hate speech against minorities, purportedly leading to an employee walkout and a massive spending boycott by nearly 200 of the company’s advertisers.  Due to these alleged actions, the shareholder plaintiff brought claims for breach of fiduciary duty, unjust enrichment, and violations of Section 14(a) of the Exchange Act of 1934 and SEC Rule 14a-9 promulgated thereunder against Mark Zuckerberg and certain other current and former Facebook directors and officers, alleging that they deceived stockholders and the market by failing to ensure compliance with federal and state laws regarding diversity and anti-discrimination, and failing to ensure that the company had an independent Chairman of the Board.
Defendants filed a motion to dismiss in the case on October 5, 2020, arguing that: (1) plaintiff failed to make a pre-suit demand on Facebook’s board or allege facts establishing that such a demand would have been futile, as required under Delaware law to sue derivatively on the company’s behalf; (2) the lawsuit was filed in the wrong forum in violation of Facebook’s Certificate of Incorporation’s forum-selection clause; (3) the allegations did not state a claim under Section 14(a) of the Exchange Act; and (4) the claims are unripe insofar as they are premised on speculative damages that have not yet occurred.
Magistrate Judge Laurel Beeler of the United States District Court for the Northern District of California granted defendants’ motion to dismiss without prejudice on March 22, 2021.  In particular, the court held that plaintiff did not make a pre-suit demand or plead plausibly that a demand was excused as futile.  The court further found that Facebook’s May 22, 2012 Restated Certificate of Incorporation’s forum-selection clause, providing that the Delaware Court of Chancery is the exclusive forum for derivative actions, is enforceable against plaintiff, thus barring the state law claims from proceeding in federal court in California.  The court also agreed with defendants that plaintiff did not plausibly plead a materially false statement with respect to the allegations stemming from Facebook’s statements in its 2019 and 2020 proxy statements regarding the company’s commitment to diversity or the purported omissions related to allegedly fraudulent company practices.  Rather, the court characterized these statements as non-actionable “aspirational assertions” and determined that they fail to support plaintiff’s claim of widespread unlawful practices.
Although the court’s commentary provides some early positive news for public companies who may be targets for shareholder lawsuits of this sort, it also serves as a reminder that public companies should take care in drafting public statements with regard to board composition and diversity efforts, particularly in connection with the 2021 proxy season. 

Virginia Federal Judge Denies Motion to Dismiss Claims That Altria Knew Juul Was Marketing to Underage Consumers

On March 12, 2021, a federal Virginia judge denied motions to dismiss an investor securities class action against Altria Group, Inc. (“Altria”), JUUL Labs, Inc. (“JUUL”), and certain executives and directors, in which plaintiffs alleged that Altria and JUUL defrauded Altria investors by not disclosing the risks created by JUUL’s marketing practices targeting underage consumers.  
The putative class action arises out of Altria’s $12.8 billion investment in JUUL in December 2018.  Plaintiffs allege that Altria and JUUL both knew, but failed to disclose to Altria’s investors, that JUUL was engaged in an e-cigarette marketing scheme that specifically targeted underage consumers, which exposed JUUL and its investors to risks.  Plaintiffs assert claims against Altria and JUUL under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder, and also claims against certain JUUL executives and directors under Section 20(b) of the Exchange Act based on their alleged control over the alleged primary violator, JUUL.
Defendants moved to dismiss, arguing that plaintiffs lacked statutory standing to bring their federal securities claims against the JUUL Defendants, did not base their allegations on any factual misrepresentations by the defendants, failed to plead “scheme liability” because they had not specified the conduct giving rise to liability, and failed to adequately allege scienter and loss causation.
In denying defendants’ motion to dismiss, the court determined that plaintiffs had statutory standing because, although plaintiffs purchased securities in Altria, not JUUL, Altria and JUUL’s businesses were “intertwined” in nature and JUUL’s misrepresentations had an alleged causal effect on the value of Altria’s stock.  The court also found that plaintiffs alleged facts sufficient to plead that defendants were liable for scheme liability where they alleged defendants acted in concert to deceive the FDA, for example, by submitting false data and studies.  As for scienter, the court reasoned that the allegations sufficiently alleged that “everyone at Altria knew that JUUL marketed to youth,” and that Altria acknowledged and even hoped to discontinue JUUL’s illegal marketing practices.  As for loss causation, the court determined that plaintiffs’ allegations that Altria’s share price declined following each partially corrective disclosure were sufficient. And, lastly, with respect to the Section 20(a) claims, the court found that plaintiffs sufficiently alleged that the individual defendants exerted sufficient control over the primary violator, JUUL.   

SEC Brings Claims Against AT&T for Violating  Regulation Fair Disclosure by Selectively Providing Information to Securities Analysts

On March 5, 2021, the SEC filed a complaint in the United States District Court for the Southern District of New York against AT&T, Inc. (“AT&T”) and three of its investor relations executives, charging them with violations of Section 13(a) of the Exchange Act and Regulation Fair Disclosure (Reg FD), 17 C.F.R. § 243.100 et seq.—an SEC rule that prohibits issuers from making selective disclosures of material nonpublic information—based on allegations that the defendants selectively disclosed AT&T’s nonpublic projected and actual financial results to equity stock analysts from approximately twenty Wall Street firms.
According to the complaint, in early March 2016, AT&T knew that its Q1 2016 revenue would fall short of analysts’ estimates due to a steeper-than-expected decline in its smartphone sales.  AT&T projected that its “equipment upgrade rate”—the rate at which existing customers purchased new smartphones—would be at a record low, and the company estimated that its consolidated gross revenue would fall more than $1 billion below the consensus estimate.  Thereafter, AT&T’s Investor Relations Director instructed the executive defendants to privately connect with certain analysts with a goal of inducing enough analysts to lower their individual estimates such that the consensus revenue estimate would fall to the level that AT&T was expected to report publicly.  In furtherance of AT&T’s alleged goal of reducing analysts’ revenue estimates, the SEC alleges that between March 9 and April 26, 2016, the executive defendants disclosed material nonpublic information to approximately twenty analyst firms regarding AT&T’s results, including its equipment upgrade rate and/or its wireless equipment revenue totals.  In certain such discussions, the executives allegedly represented that they were conveying publicly available consensus estimates, when in fact they were providing nonpublic information.  As a result, the analyst firms that AT&T had targeted adjusted their revenue estimates, resulting in a reduced consensus revenue forecast for Q1 2016.
On April 25, 2016—the day before AT&T reported its Q1 2016 earnings—the consensus revenue estimate was just below what AT&T knew it would ultimately report.  AT&T reported $40.535 billion in revenue for Q1 2016, beating the final consensus revenue estimate by less than $100 million.
Due to the alleged actions described above, the SEC brought rare Section 13(a) claims against AT&T arising out of alleged violations of Reg FD.  The three investor relations executives are charged with knowingly or recklessly providing substantial assistance to AT&T with respect to such alleged violations.  More information about this enforcement action can be found here.

Ninth Circuit Reverses Dismissal Under SLUSA of Class Action Fiduciary Duty Claims Under State Law 

On March 4, 2021, the Ninth Circuit reversed the United States District Court for the Eastern District of California’s dismissal of an investor class action against a financial services firm, Edward D. Jones & Co., L.P. (“Edward Jones”), alleging that the firm breached its fiduciary duties under state law by moving investors’ assets from commission-based to fee-based accounts without conducting a suitability analysis to assess whether a fee-based account was in the investors’ best interests. 
The district court had dismissed the complaint, holding that the Securities Litigation Uniform Standards Act (“SLUSA”) barred plaintiffs from bringing their state law fiduciary duty claims in a federal class action.  The court also dismissed the investors’ claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, which (like the fiduciary duty claims) also were premised on Edward Jones’s failure to conduct a suitability analysis.  The investor plaintiffs only appealed the dismissal of their state law claims.  
The Ninth Circuit reversed, holding that SLUSA did not bar the state law class action claims because Edward Jones’s alleged failure to conduct a suitability analysis did not constitute a misrepresentation or omission “in connection with the purchase or sale of a covered security,” as required for SLUSA’s class action bar to apply.  The panel held that SLUSA’s use of the phrase “in connection with” requires demonstrating that the misrepresentation or omission in question was “material” to a decision to buy or sell a security.  In reversing the dismissal of the state law claims, the Ninth Circuit held that Edward Jones’s alleged failure to conduct a suitability analysis before inviting plaintiffs to switch to fee-based accounts was not material for SLUSA purposes because the investor plaintiffs did not allege that they would have purchased or sold different securities if defendants had conducted such an analysis.  

Morgan Mordecai
Nicholas Reider

Emily Notini
Batoul Husain