Securities Snapshot June 29, 2021

SCOTUS Vacates Class Certification In Suit Against Goldman Sachs And Clarifies Appropriate Scope Of Price Impact Evidence

Summary
SCOTUS Vacates Class Certification In Suit Against Goldman Sachs And Clarifies Appropriate Scope Of Price Impact Evidence; Stockholders Strike $110 Million Settlement In Suit Alleging Breaches Of Fiduciary Duties By Former GCI Liberty Inc. Directors And Controlling Stockholders; Ninth Circuit Reverses Dismissal Of Securities Fraud Class Action Against Alphabet Inc. For Failure To Disclose Google+ Cybersecurity Issues; District Court Dismisses MoneyGram Fraud Charges, Marking End To The Company’s 8-Year Compliance Overhaul As Part Of DOJ Deferred Prosecution Agreement

SCOTUS VACATES CLASS CERTIFICATION IN SUIT AGAINST GOLDMAN SACHS AND CLARIFIES APPROPRIATE SCOPE OF PRICE IMPACT EVIDENCE

On June 21, 2021, in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, the United States Supreme Court vacated class certification in a class action suit against Goldman Sachs and clarified the standards that govern class certification in securities fraud actions. Further, the Court provided guidance on how parties can prove whether alleged misrepresentations affect a defendant’s stock price, a concept known as price impact. Previous Securities Snapshot publications have discussed the Supreme Court’s grant of certiorari and oral argument in this case.

The underlying action involves securities fraud claims brought against Goldman Sachs and certain of its former executives alleging violations of Section 10(b) of the Securities Exchange Act of 1934 for misrepresentations the defendants purportedly made about Goldman Sachs’ conflict of interest policies and practices. Plaintiffs are proceeding under a so-called “inflation maintenance” or “price maintenance” theory, which provides that a misrepresentation that does not move the stock price still can have a price impact if it serves to maintain an already inflated stock price. Specifically, plaintiffs allege that certain generic statements made by Goldman Sachs — including “[o]ur clients’ interests always come first” and “[i]ntegrity and honesty are at the heart of our business” — allowed the company to maintain an inflated stock price because they failed to reflect that Goldman Sachs was engaging in supposedly conflicted transactions without disclosing its conflicts. 

Fighting plaintiffs’ efforts to certify class, Goldman Sachs sought to rebut plaintiffs’ reliance on the presumption that a stock price incorporates all public information, including all alleged misrepresentations — as blessed by the Court’s 1988 decision, Basic v. Levinson — by presenting expert testimony to show that the alleged misrepresentations were too generic to have an impact on stock price. But the district court disagreed and certified the class, concluding that Goldman Sachs had failed to prove by a preponderance of the evidence that the alleged misrepresentations had no price impact. The Second Circuit ultimately affirmed the district court.

In reviewing the Second Circuit’s ruling, the Supreme Court first considered its 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc. — which held that courts should consider all evidence relevant to price impact at the class certification stage — and held that the nature of alleged misrepresentations should be considered in deciding price impact. Here, the Court explained that, “[t]he generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory,” in part because “when the earlier misrepresentation is generic (e.g., ‘we have faith in our business model’) and the later corrective disclosure is specific (e.g., ‘our fourth quarter earnings did not meet expectations’),” “it is less likely that the specific disclosure actually corrected the generic misrepresentation,” meaning there is less reason to infer an actual price impact. The 8-Justice majority doubted whether the Second Circuit had in fact considered the generic nature of the alleged misrepresentations and, therefore, the Court vacated the Second Circuit’s decision and remanded the case to the Second Circuit for further consideration.

STOCKHOLDERS STRIKE $110 MILLION SETTLEMENT IN SUIT ALLEGING BREACHES OF FIDUCIARY DUTIES BY FORMER GCI LIBERTY INC. DIRECTORS AND CONTROLLING STOCKHOLDERS 

On June 17, 2021, in Hollywood Firefighters’ Pension Fund et al. v. Malone et al., the parties filed a proposed $110 million settlement to end a stockholder class action suit against six former directors and controlling stockholders of GCI Liberty Inc. in connection with GCI’s $8.7 billion acquisition by Liberty Broadband Corp. in December 2020.

In October 2020, a putative class of GCI stockholders, led by the Hollywood Firefighters’ Pension Fund, sued six former directors and controlling stockholders of GCI, alleging breaches of fiduciary duties, violation of Delaware law restricting certain mergers involving interested stockholders, and sought to enjoin the pending merger between GCI and Liberty Broadband. On January 4, 2021, plaintiffs filed their second amended Complaint.

Plaintiffs alleged that Dr. John C. Malone, Chairman of the GCI Board and Gregory Maffei, CEO and director of both GCI and Liberty Broadband, used their super-voting stock to push through the merger between GCI and Liberty Broadband on unfair terms in order to realize improper benefits for themselves. Specifically, plaintiffs alleged that the merger (i) improperly and unfairly perpetuated Malone, Maffei, and other’s control over the combined entity; and (ii) irreversibly and unfairly stripped GCI’s Series A stockholders of 100% of the voting power of their shares; and (iii) deprived GCI stockholders of fair market consideration of their shares.

All named defendants denied the plaintiffs’ allegations as part of the settlement, the terms of which oblige defendants’ insurers or the merger successor to pay the settlement. With court approval, the settlement could provide stockholder counsel with as much as $22 million in fees and expenses.

NINTH CIRCUIT REVERSES DISMISSAL OF SECURITIES FRAUD CLASS ACTION AGAINST ALPHABET INC. FOR FAILURE TO DISCLOSE GOOGLE+ CYBERSECURITY ISSUES

On June 16, 2021, in In re Alphabet, Inc. Securities Litigation, the Ninth Circuit partially reversed the U.S. District Court for the Northern District of California’s dismissal of a securities fraud class action against Alphabet, its subsidiary Google, Inc., and several of the companies’ senior executives, which alleged violations of securities laws stemming from Alphabet’s failure to disclose its March 2018 discovery of a security glitch and other vulnerabilities in its Google+ social network.
 
Specifically, in March and April 2018, Google investigators discovered a software glitch in the Google+ social network that had existed since 2015, which allowed third-party developers access to certain users’ profile data that had been designated as “nonpublic,” e.g. email addresses, birthdates, profile pictures, occupations, and places lived. Google’s investigation into the software glitch revealed other shortcomings in Google’s security systems, which according to the complaint, “made additional data exposures virtually inevitable.” The complaint alleges that, in April 2018, Alphabet opted not to disclose the discovery in its quarterly reports and other public disclosures based on fears of regulatory scrutiny and reputational harm in the wake of the Cambridge Analytica scandal impacting Facebook Inc. These security vulnerabilities, and Alphabets’ decision to conceal them, were later exposed by the Wall Street Journal, in October 2018. Alphabet’s share price fell in the days that followed the article’s release, leading the state of Rhode Island, on behalf of its employee retirement plan, among other plaintiffs, to quickly file suit. The consolidated complaint names Alphabet, Google, Alphabet CEO Larry Page, Google CEO Sundar Pichai, and two in-house Google lawyers involved in preparing an internal legal and policy staff memo that detailed Google’s cybersecurity issues and warned of the likely adverse consequences of disclosure (the “Privacy Bug Memo”).
 
The district court dismissed the complaint in full, holding that it failed to allege any material misrepresentation or omission and failed to sufficiently allege scienter — based, in part, on the fact that Google implemented a fix for the software glitch before the allegedly misleading statements in Alphabet’s quarterly reports were made. The Ninth Circuit reversed, holding that the complaint sufficiently alleged that Alphabet’s omission of the security bug’s discovery rendered risk disclosures in its April and July Form 10-Qs materially misleading, and that senior executives at both Alphabet and Google knew of the cybersecurity vulnerabilities, as well as the consequences of disclosure, yet intentionally chose not to disclose them. 
 
As to the Form 10-Q statements, the Ninth Circuit held that, although Alphabet’s risk disclosures warned that concerns about its “practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters” could result in reputational damage, these disclosures were misleading because Alphabet knew that the risk had already materialized. The Court rejected the lower court’s conclusion that “a remediated technological problem which is no longer extant [need not] be disclosed in the company’s future-looking disclosures,” finding that “the material implications of a bug that improperly exposed user data for three years were not eliminated merely by plugging a hole.” The Court further held that the omission was material due to the “scale of the data-privacy and security-vulnerability problems identified” and in light of defendants’ own statements acknowledging that “user trust and public perceptions of [its] security and privacy” controls were “central to Alphabet’s business.”
 
As to scienter, the Court held that the complaint sufficiently alleged a strong inference of scienter because the Privacy Bug Memo informed Google’s senior executives of the “scope of the problem, warned of the consequences of disclosure, and presented [them] with a clear decision on whether to disclose those problems.” Moreover, the Court determined that the complaint alleged a strong inference that Alphabet intentionally did not disclose the cybersecurity information because it wanted “to avoid or delay the impacts disclosure could have on regulatory scrutiny, public criticism, and loss of consumer confidence.”

DISTRICT COURT DISMISSES MONEYGRAM FRAUD CHARGES, MARKING END TO THE COMPANY’S 8-YEAR COMPLIANCE OVERHAUL AS PART OF DOJ DEFERRED PROSECUTION AGREEMENT

On June 10 2021, in United States v. MoneyGram International Inc., the U.S. District Court for the Middle District of Pennsylvania dismissed anti-money laundering charges against Dallas-based MoneyGram on the government’s motion. The dismissal marks the end of an eight-year deferred prosecution agreement (“DPA”) between MoneyGram and the U.S. Department of Justice, in which the company admitted to aiding and abetting wire fraud and violating the Bank Secrecy Act (“BSA”), forfeited at least $225 million, and agreed to implement enhanced compliance measures. 

In 2012, MoneyGram — a publicly traded, global financial services business that enables the transfer of money throughout the world — was charged with aiding and abetting wire fraud (18 U.S.C. § 1343) and willfully failing to implement and maintain effective anti-money laundering procedures, in violation of the BSA (31 U.S.C. §§ 5318(h), 5322). In connection with these charges, MoneyGram entered into an initial five-year DPA that required the company to (i) acknowledge responsibility for its criminal conduct, (ii) forfeit $100 million, (iii) implement certain policies and procedures to its anti-money laundering and anti-fraud programs, (iv) retain an independent compliance monitor to assess its progress doing so, and (v) submit quarterly reports to the DOJ regarding, among other things, transactions at certain MoneyGram outlets and consumer fraud complaints. Although MoneyGram made efforts to comply with its obligations under the DPA, fraud complaints increased in 2015 and, in 2017 the independent auditor informed MoneyGram’s Board that many problems remained with its anti-money laundering and anti-fraud programs. Due to the continued compliance issues, and following discussions with the government, the DOJ determined, in November 2018, that MoneyGram breached the DPA. The parties agreed to extend the DPA to May 2021 and amend it to require additional compliance improvements and forfeiture of an additional $125 million. 

In April 2021, pursuant to the amended DPA, the independent monitor certified that MoneyGram’s anti-fraud and AML compliance program improvements were “reasonably designed and implemented to detect and prevent fraud and money laundering and to comply with the Bank Secrecy Act.” In May 2021, MoneyGram certified that it had fulfilled its obligations under the DPA and 2018 amendment. The DOJ agreed and moved to dismiss the two-count information with prejudice, finding that MoneyGram’s cooperation with the DOJ, “progress in deterring and reducing fraud,” and enhanced anti-money laundering and anti-fraud programs justified dismissal. On June 10, 2021, the Court granted the government’s unopposed motion, dismissing the criminal charges against MoneyGram with prejudice. 

Editorial Board:
Morgan Mordecai

Contributors:
Viktors Dindzans
Katherine Fahey
Jacob Raver